3. Jasper Metals is considering installing a new molding machine which is expect

Question

3. 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?

3. 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?

3. 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

decrease in working capital = decrease in inventory-increase in accounts receivable+increase in payables

= 16000-21000+15000 = 10000

Time line 0 1 2 3 4 5 6 7 Project cost -249000 +decrease in working capital 10000 =Initial Investment outlay -239000 operating cash flow 73000 73000 73000 73000 73000 73000 73000 =after tax operating cash flow 73000 73000 73000 73000 73000 73000 73000 Reversal of Increase in working capital -10000 =+After tax salvage 48000 = Terminal year after tax non operating CF Total Cash flow -239000 73000 73000 73000 73000 73000 73000 111000 Discount rate= 14.50% Discount factor = (1 + discount rate) ^ corresponding period 1 1.145 1.311025 1.501124 1.718787 1.968011 2.253372 2.580111 Discounted cashflow = total cash flow/discount factor -239000 63755.46 55681.62 48630.24 42471.82 37093.3 32395.89 43021.4 NPV= Sum of discounted cash flow = 84049.74

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