Question

Joanette, Inc., is considering the purchase of a machine that would cost $670,000 and would last for 10 years, at the end of which, the machine would have a salvage value of $57,000. The machine would reduce labor and other costs by $117,000 per year. Additional working capital of $3,000 would be needed immediately, all of which would be recovered at the end of 10 years. The company requires a minimum pretax return of 13% 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.)

Net present value:

Answer 1

Calculation of net present value

net present value = present value of cash inflow-initial investment

present value of cash inflow = (117000*PVA @13%, 10 years)+(57000*PVF @13%,10 year)+(3000*PVF @13%,10 year)

present value of cash inflow = (117000*5.426)+(57000*0.295)+(3000*0.295)

present value of cash inflow = 634842+16815+885

present value of cash inflow = 652542

initial investment = (670000+3000) = 673000

Net present value = 652542-673000

net present value = -20458

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