Question

Lamping, 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).

Required:
Determine the net present value of the project.

Answer 1

Lamping, Inc.

The net present value of the project is:

= ($22,544)

Step-by-step explanation:

a) Data and Calculations:

Cost of machine = $520,000

Useful life of machine = 7 years

Salvage value = $52,000

Cost savings = $112,000 per year

Initial working capital $6,000

Recovered working capital = $6,000

Minimum required pretax return = 14%

PV of initial costs = $526,000 ($520,000 + $6,000)

PV of costing savings (annuity) = $480,256 ($112,000 * 4.288)

PV of salvage and recovered working capital = $23,200 ($58,000 * 0.400)

Total savings/benefits = $503,456 ($480,256 + $23,200)

NPV = ($22,544)