Gillaspie, Inc., is considering the purchase of a machine that would cost $300,0

Question

Gillaspie, Inc., is considering the purchase of a machine that would cost $300,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $51,000. The machine would reduce labor and other costs by $86,000 per year. Additional working capital of $10,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 13% on all investment projects.

The net present value of the proposed project is closest to:

Explanation / Answer

Present value of an annuity for 5 years 13% = 3.517 (using formula or from tables)

Cashflows at year 0 -300000 - 10000 = -$310000

Present value for Annuity of $86000 for 5 years = 86000 x 3.517 = $302462

Present value of salvage value and working capital released at year 5 = (51000 + 10000) x 0.543 = $33123

Thus, net present value = -310000 + 302462+ 33123 = $25585

Hope this helps!

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