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 12B-1 and Exhibit 12B-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

Solution:

Computation of NPV of Project
Particulars	Period	PV Factor@14%	Amount	Present Value
Cash Inflows:
Annual Saving in costs from Year 1-7	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 (NPV)				-$22,531