Jasper Metals is considering installing a new molding machine which is expected
ID: 2472725 • Letter: J
Question
Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $73,000 a year for 7 years. At the beginning of the project, inventory will decrease by $16,000, accounts receivables will increase by $21,000, and accounts payable will increase by $15,000. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $249,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $48,000 aftertax cash flow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 14.5 percent?
Explanation / Answer
Net working capital = 37,000 - 15,000
=$22,000
NPV = -249,000
Cash flow from 73,000 =308,321.69
Working capital
22,000* .3876 =8,527.20
Salvage value
(48,000 * .3876) = 18,604.80
Net present value =$86,453.69
Net working capital = 37,000 - 15,000
=$22,000
NPV = -249,000
Cash flow from 73,000 =308,321.69
Working capital
22,000* .3876 =8,527.20
Salvage value
(48,000 * .3876) = 18,604.80
Net present value =$86,453.69
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