Question

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?

Answer 1

Answer:

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