Difend Cleaners has been considering the purchase of an industrial dry-cleaning

Question

Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $100,000. The new machine will cost $350,000 and an additional cash investment in working capital of $100,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $110,000 in additional cash inflows during the first year of acquisition and $250,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment, assuming the required rate of return is 20%? Would the company want to purchase the new machine? A) $(62,600); yes B) $(59,880); no C) $59,880; yes D) $62,600; no

Explanation / Answer

Answer = $59,800 yes

Year Inflow/outflow Discount factor Present value 0 purchase price (350,000) 1.0000 (350,000) Working capital (100,000) 1.00 (100,000) sale price 100,000 1.000 100,000 Year 1 110,000 .833 91,630 year 2 250,000 .694 173,500 year 3 250,000 .579 144,750 Net present value $59,880

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