(Ignore income taxes in this problem.) The Connelly Company has funds available

Question

(Ignore income taxes in this problem.) The Connelly Company has funds available to invest in the following project:

Initial investment in new machinery................................. $200,000
Annual net cash inflows from operations........................... $60,000
Working capital investment required now.......................... $80,000
Single cash outflow for an overhaul of the machinery
a the end of three years..................................................... $50,000
Salvage value of the machinery in seven years......................... $40,000
Life of the project................................................................. 7 years
Required rate of return.......................................................... 18%

The working capital needed now would be released at the end of the seven years for investment elsewhere.

Consider only the cash flows for the seventh year. The present value of the net cash flow (cash inflows less cash outflows) for this year only is:

Explanation / Answer

cash flow from sale of machine =$50,000 - ($50,000- $40,000 )*tax% = $50000 cash flows for the seventh year =$60,000 + $50000 = $110000 present value of the net cash flow = $110000/1.18^7 = $34,531.75

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