Question

Joanette, Inc., is considering the purchase of a machine that would cost $530,000 and would last for 6 years, at the end of which, the machine would have a salvage value of $53,000. The machine would reduce labor and other costs by $113,000 per year. Additional working capital of $7,000 would be needed immediately, all of which would be recovered at the end of 6 years. The company requires a minimum pretax return of 12% 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

Answer 1

	Now	1	2	3	4	5	6
Purchase of equipment	-530000
Working capital investment	-7000
Annual cash flows		113000	113000	113000	113000	113000	113000
Working capital released							7000
Salvage value of equipment							53000
Total cash flows	-537000	113000	113000	113000	113000	113000	173000
Discount factor (12%)	1	0.893	0.797	0.712	0.636	0.567	0.507
Present value	-537000	100909	90061	80456	71868	64071	87711
Net present value	-41924	or -42037