Question

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.)

Answer 1

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