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8 October, 13:07

Joanette, Inc., is considering the purchase of a machine that would cost $520,000 and would last for 7 years, at the end of which, the machine would have a salvage value of $52,000. The machine would reduce labor and other costs by $112,000 per year. Additional working capital of $6,000 would be needed immediately, all of which would be recovered at the end of 7 years. The company requires a minimum pretax return of 14% on all investment projects. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor (s) using the tables provided. Required: Determine the net present value of the project. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount.)

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  1. 8 October, 16:24
    0
    Net present value = - $22,531

    Explanation:

    As per the data given in the question,

    Computation of NPV project

    Particulars Period Pv factor at 14% Amount Present value

    Cash inflows:

    Annual saving in costs 1-7 4.288305 $112,000 $480,290

    Salvage value 7 0.399637 $52,000 $20,781

    Recovery of working capital 7 0.399637 $6,000 $2,398

    Present value of cash inflows $503,469

    Less: Cash outflows

    Cost of Machine 0 1 $520,000 $520,000

    Working capital 0 1 $6,000 $6,000

    Net present value - $22,531

    Working Note

    The present value of cash inflows is

    $480,290 + $20,781+$2,398 = $503,469

    And, the net present value is

    = $503,469 - $520,000-$6,000

    = - $22,531
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