Question

Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $62,000 per year for 7 years. At the beginning of the project, inventory will decrease by $21,600, accounts receivables will increase by $23,800, and accounts payable will increase by $17,100. 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 $270,000. 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 $62,000. What is the net present value of this project given a required return of 10.7 percent?

A. $71, 736

B. $63,424

C.$63,030

D. $60,289

E. $75,147

Answer 1

PV of Incremental OCF = 62000*(1.107^7-1)/(0.107*1.107^7) =	$      2,95,010
PV of after tax salvage value = 62000/1.107^7 =	$         30,434
PV of investment in NWC at t7 = (21600+17100-23800)/1.107^7 =	$          -7,314
Cost of molding machine	$    -2,70,000
Reduction in NWC at t0	$         14,900
NPV	$         63,030
Answer: Option [C] $63,030