Jasper Metals is considering installing a new molding machine which is expected
ID: 2719190 • 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 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
Initially, in addition to the cost of the molding machine, working capital of $ 10,000 would be needed, as computed below.
Decrease in inventory +16,000
Increase in accounts receivable - 21,000
Increase in accounts receivable +15,000
Net additional working capital required is $ 10,000
The new molding machine is recommended to be installed, as the investment will yield a net present value of
$ 71,652
Period Cash outflows Annual cash inflows Working capital recovered Resale value of equipment PV factor at 14.5% Present Value 0 249,000 1 (249,000) 0 10,000 1 (10,000) 1 73,000 0.873 63,729 2 73,000 0.763 55,699 3 73,000 0.666 48,618 4 73,000 0.582 42,486 5 73,000 0.508 37,084 6 73,000 0.443 32,339 7 73,000 10,000 48,000 0.387 50,697 NPV 71,652Related Questions
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