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FN3440: Week 5 Leverage and Cash flows

Analysis 5.1

New Project Analysis

1

The Chung Chemical Corporation is considering the purchase of a chemical analysis machine. Although the

machine being considered will result in an increase in earnings before interest and taxes of $35,000 per year, it has

a purchase price of $100,000, and it would cost an additional $5,000 to properly install the machine. In addition, to

properly operate the machine, inventory must be increased 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 a required rate of return of 15

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 this machine be purchased?

Source: Keown, A. J., Martin, J. D., & Petty, J. W. (2011). Foundations of finance: The logic and practice of financial

management (7th ed.). Boston, MA: Pearson Education.

Submission Requirements:

 Answer each problem in detail with an appropriate rationale.

 Submit your answer in a Microsoft Excel or Word file, showing step-by-step solutions to all calculations.

 Use APA formatting and 12 point font with a minimum of two pages.

Evaluation Criteria:

Click here to view the grading rubric for this analysis. Your submission will be evaluated against the following

criteria using the grading rubric:

 Did you answer the questions completely and effectively?

 Did you validate your calculations and results?

 Did you state a good rationale for your decision to purchase or not to purchase?