Janes, Inc., is considering the purchase of a machine that would cost $550,000 a

Question

Janes, Inc., is considering the purchase of a machine that would cost $550,000 and would last for 6 years, at the end of which, the machine would have a salvage value of $55,000. The machine would reduce labor and other costs by $115,000 per year. Additional working capital of $9,000 would be needed immediately, all of which would be recovered at the end of 6 years. The company requires a minimum pretax return of 12% on all investment projects. (Ignore income taxes.)

Determine the net present value of the project.

Required:

Determine the net present value of the project.

Explanation / Answer

Calculation of net present value of project

Particulars Amount Discounting factor Present value Outflow due to Initial Cost of Project 550000 1 550000 Inflow of Salvage value (55000) 12% at 6th yr i.e. 0.507 (27885) Saving of labor & Other cost 115000 p.a. 12% for 6 years i.e. 4.111 (472765) Outflow of working capital 9000 1 9000 Recovery of working capital (9000) 12% at 6th yr i.e. 0.507 (4563) Total Outflow or net present value of project 53787

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