Janes, Inc., is considering the purchase of a machine that would cost $470,000 a
ID: 2574951 • Letter: J
Question
Janes, Inc., is considering the purchase of a machine that would cost $470,000 and would last for 5 years, at the end of which, the machine would have a salvage value of $57,000. The machine would reduce labor and other costs by $117,000 per year. Additional working capital of $3,000 would be needed immediately, all of which would be recovered at the end of 5 years. The company requires a minimum pretax return of 15% on all investment projects. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using tables. Required: Determine the net present value of the project. (Negative amount should be indicated by a minus sign Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response. Net present valueExplanation / Answer
NPV = PV of cash inflow – initial cost
Cash inflow = cost of asset + net working capital
= 470000 + 3000
= $473000
Year
Cash Inflow
PV factor
PV of cash flow
1
117000
0.86957
101739.1304
2
117000
0.75614
88468.80907
3
117000
0.65752
76929.39919
4
117000
0.57175
66895.12973
5
177000
0.49718
88000.28215
Total
422032.7506
Initial cost
473000
NPV
-50967.24941
PV of project is -50967
Year
Cash Inflow
PV factor
PV of cash flow
1
117000
0.86957
101739.1304
2
117000
0.75614
88468.80907
3
117000
0.65752
76929.39919
4
117000
0.57175
66895.12973
5
177000
0.49718
88000.28215
Total
422032.7506
Initial cost
473000
NPV
-50967.24941
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