Capital Budgeting (Essay Sample)

Instructions:

Q1: the Chung Chemical Corporation is considering the purchase of chemical analysis machine. Although the machine being considering will result in an increase in earnings before interest and taxes of $35000 per year it has a purchase price if $100,000 and it would cost an additional $5,000 after tax to properly install this machine. In addition, to properly operate this machine, inventory must be increase by $5,000. This machine has an expected life of 10 years, after which it will have no salvage value. Also assume simplified straight- line depreciation and that this machine is being depreciated down to zero, a 34 percent marginal tax rate, and required rate of return of 15% a) What is the initial outlay associated with this project? b) What are the annual after-tax cash flows associated with this project for year 1 through 9? c) What is the terminal cash flow in year 10 (what is the annual after-tax cash flow in year 10 plus any additional cash flows associated with termination of the project)? d) Should this machine b purchased?

source..

Content:

Name
Course
Instructor
Date
Capital Budgeting
What is the initial outlay associated with this project?
The initial outlay associated with this project =the acquisition price + installation cost + inventory increase cost
Initial outlay =$100,000+$5000+$5000
= $110,000
What are the annual after tax cash- flows associated with this project for year 1 through year 9 The cash- flows associated with this project = earnings before interest and tax less depreciation and tax. Straight line depreciation = total cost of the machine/useful life
=$11, 0000/10 years
=$11,000
Tax =34%*35000
=$11900
Cash –flows for 1 year =35000 – (11000 +11900)
=35000-22900
=$12100
Cash -flows for 9 years =12100*9=$108900
What is the terminal cash -flow in year 10 (what is the annual after tax cash- flow in year 10 plus any additional cash- flows associated with termination of this project)?
Terminal cash- flow in year 10 =earnings before interest and tax less depreciation –expected returns =35000-11000-(15%*110000)
=35000-11000 -16500
=$7500
Annual after tax cash- flow in year 10 =earnings before interest and tax – (depreciation + tax)
=35000- (11900+11000)
=$12100
Should this machine be bought?
The decision whether to buy the ...

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Capital Budgeting (Essay Sample)

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