Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually. Due to the sales increase, Delta will need to increase working capital by $1,000 at the beginning of the project. Delta will depreciate the machine using the straight-line method over the project’s five year life to a salvage value of zero. The machine’s purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent.
a) Installed Cost of the Machine
b) The Initial Investment of the project
c) The project’s incremental after-tax free cash flow for year 1 (CF1)
d) The project’s incremental after-tax free cash flow for year 5 (CF5)
e) NPV
f) IRR
g) Profitability Index
f) Should the project be purchased
