Question

Jasper Metals is considering installing a new molding machine which is expected to produce operating cash...

Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of \$58,000 per year for 7 years. At the beginning of the project, inventory will decrease by \$18,400, accounts receivables will increase by \$22,200, and accounts payable will increase by \$15,900. 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 \$258,000. 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 \$54,000. What is the net present value of this project given a required return of 10.3 percent?

Initial Investment = \$258,000
Useful Life = 7 years
Annual OCF = \$58,000
After-tax Salvage Value = \$54,000
Required Return = 10.30%

Change in NWC = Change in Inventory + Change in Accounts Receivable - Change in Accounts Payable
Change in NWC = -\$18,400 + \$22,200 - \$15,900
Change in NWC = -\$12,100

NPV = -\$258,000 + \$12,100 + \$58,000 * PVIFA(10.30%, 7) + \$54,000 * PVIF(10.30%, 7) - \$12,100 * PVIF(10.30%, 7)
NPV = -\$258,000 + \$12,100 + \$58,000 * (1 - (1/1.1030)^7) / 0.1030 + \$54,000 / 1.1030^7 - \$12,100 / 1.1030^7
NPV = -\$245,900 + \$58,000 * 4.820704 + \$41,900 * 0.503467
NPV = \$54,796.10

NPV of this project is \$54,796.10