Question

Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $55,000 per year for 7 years. At the beginning of the project, inventory will decrease by $16,000, accounts receivables will increase by $21,000, and accounts payable will increase by $15,000. At the end of the project, net working capital will return to the level it was prior to undertaking the new project. The initial cost of the molding machine is $249,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating an aftertax cash flow of $48,000. What is the net present value of this project given a required return of 9.9 percent?

A. $48,746

B. $56,525

C. $59,426

D. $47,504

E. $47,129

Answer #1

CF0 = -$249,000 + $16,000 - $21,000 + $15,000 = -$239,000

C07 = $55,000 + $48,000 - $16,000 + $21,000 - $15,000 = $93,000

We need to enter the following values in the financial calculator:

Press CF, then press 2nd, CE/C, to clear the CF spreadsheet.

Now, enter CF0 = -$239,000; Press down key, enter C01 = $55,000, press down key, enter F01 = 6; press down key; enter $93,000, press down key(twice).

Now, press NPV, enter I = 9.9%, press down key, then CPT, which gives NPV = $49,271.45

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