Jasper Metals is considering installing a new molding machine which is expected
ID: 2743151 • 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
Answer
Figures in $
Year
Operating cash flow
Initial Cost of machine
Working capital
Salvage value
Cash flow
Disc Rate : 14.5%
Present value
A
B
C
D
E
F
A+B+C+D
E*F
0
-249000
10000
-239000
1
-239000
1
73000
73000
0.873362
63755.46
2
73000
73000
0.762762
55681.62
3
73000
73000
0.666168
48630.24
4
73000
73000
0.581806
42471.82
5
73000
73000
0.508127
37093.3
6
73000
73000
0.443779
32395.89
7
73000
-10000
48000
111000
0.38758
43021.4
Net present value
84049.74
Figures in $
Year
Operating cash flow
Initial Cost of machine
Working capital
Salvage value
Cash flow
Disc Rate : 14.5%
Present value
A
B
C
D
E
F
A+B+C+D
E*F
0
-249000
10000
-239000
1
-239000
1
73000
73000
0.873362
63755.46
2
73000
73000
0.762762
55681.62
3
73000
73000
0.666168
48630.24
4
73000
73000
0.581806
42471.82
5
73000
73000
0.508127
37093.3
6
73000
73000
0.443779
32395.89
7
73000
-10000
48000
111000
0.38758
43021.4
Net present value
84049.74
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