Jasper Metals is considering installing a new molding machine which is expected

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 receivable 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

Hi,

Please find the answer as follows:

Intiial Cash Outlay = -249000 +16000 - 21000 +15000 = -239000

Yearly Cash Inflows = 73000

NPV = -239000 + 73000/(1+.145)^1 + 73000/(1+.145)^2 + 73000/(1+.145)^3 + 73000/(1+.145)^4 + 73000/(1+.145)^5 + 73000/(1+.145)^6 + 73000/(1+.145)^7-10000/(1+.145)^7 + 48000/(1+.145)^7 = 84049.74

NPV is 84049.74.

Thanks.

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