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

Question

Hawkeye 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 $60,000. The new machine will cost $200,000 and an additional cash investment in working capital of $60,000 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 $50,000 in additional cash inflows during the year of acquisition and $150,000 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 24%?

Would the company want to purchase the new machine?

$(32,800); yes

$16,400; yes

$32,800; no

$(16,400); no

Explanation / Answer

Cash Outflow Cash Inflow Net cash flow Year 0 Net Investment ( 200000 - 60000) -140000 50000 -150000 working capital requirement -60000 Year 1 AND 2 150000 150000 NPV = Cash flow * ( 1 - ( 1+ i)-n)/I - initial investment Cash flow = 150000 I = 24% = 0.24 n = 2 ( as year of acquisition is 1st year) NPV = 150000 * ( 1 - ( 1+0.24)-2)/0.24 - 150000          = 150000 * ( 1- (1.24)-2)/0.24 - 150000          = 150000 * ( 1 - 0.6504)/0.24 - 150000          = 150000 * 0.3496/0.24 - 150000           = 150000 * 1.46 - 150000           = 218500 - 150000           = 68500 As the NPV is positive , the investment should be made

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.