Financial Management and GT Inc Case Study Accounting Assignment Help

Assignment Task

QUESTION
GT Inc., is considering the purchase of a new production machine for $200,000. The purchase of this would result in an increase in earnings before interest and taxes of $50,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $5,000 after taxes. In addition, it would cost $5,000 after taxes to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $20,000. This machine has an expected life of 10 years, after which it would have no salvage value. Finally, to purchase the new machine, it appears that the firm would have to borrow $100,000 at 8 percent interest from its local bank, resulting in additional interest payments of $8,000 per year. The firm uses the straight-line method to depreciate this machine down to zero, a 34 per cent tax rate and a required rate of return of 10 percent.

Required:
a. What is the initial cash outlay associated with this project?
b. What are the annual net cash flows associated with this project for Years 1 through 9
c. What is the terminal cash flows in Year 10?
d. Calculate the NPV and decide whether the machine should be purchased?
e. When a firm finances a new investment, it often borrows part of the money, so the interest and principal payments this creates are incremental to the projects acceptance. Why are these expenditures not included in the projects cash flow computation

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