2. Accounting
3. garcias truckin inc is considering the purchase of a new...

# Question: garcias truckin inc is considering the purchase of a new...

###### Question details

Garcia's Truckin' Inc. is considering the purchase of a new production machine for $150,000. The purchase of this machine will result in an increase in earnings before interest and taxes of$60,000 per year. To operate the machine​ properly, workers would have to go through a brief training session that would cost $4,000 after taxes. It would cost$4,000 to install the machine properly.​ Also, because this machine is extremely​ efficient, its purchase would necessitate an increase in inventory of $15,000. This machine has an expected life of 10 years, after which it will have no salvage value.​ Finally, to purchase the new​ machine, it appears that the firm would have to borrow​$100,000 at 9 percent interest from its local​ bank, resulting in additional interest payments of \$9,000 per year. Assume simplified​ straight-line depreciation and that the machine is being depreciated down to​ zero, a 34 percent marginal tax​ rate, and a required rate of return of 14 percent.

a. What is the initial outlay associated with this​ project?

b. What are the annual​ after-tax cash flows associated with this project for years 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 the termination of the​project)?

d. Should the machine be​ purchased?