Jefferson Products, Inc., is considering purchasing a new automatic press brake,

Question

Jefferson Products, Inc., is considering purchasing a new automatic press brake, which costs $300,000 including installation and shipping. The machine is expected to generate net cash inflows of $80,000 per year for 10 years. At the end of 10 years, the book value of the machine will be $0, and it is anticipated that the machine will be sold for $100,000. If the press brake project is undertaken, Jefferson will have to increase its net working capital by $75,000. When the project is terminated in 10 years, there will no longer be a need for this incremental working capital, and it can be liquidated and made available to Jefferson for other uses. Jefferson requires a 12 percent annual return on this type of project and its marginal tax rate is 40 percent. a. Calculate the press brake's net present value. b. Is the project acceptable? c. What is the meaning of the computed net present value figure? d. What is the project's internal rate of return? e. For the press brake project, at what annual rates of return do the net present value and internal rate of return methods assume that the net cash inflows are being reinvested?

Explanation / Answer

Year Year 1-10 Year 10 Year 10 0 -300000 Project Cost Equipment sale NWC 0 -75000 NWC revenue 80000 100000 1 60000 OCF depreciation 30000 2 60000 OCF Net Revenue 50000 3 60000 OCF Tax @ 40% 20000 40000 4 60000 OCF Revenueafter tax 30000 60000 5 60000 OCF Add: Depreciation 30000 6 60000 OCF OCF 60000 60000 75000 195000 *OCF 7 60000 OCF 8 60000 OCF 9 60000 OCF 10 195000 OCF* NPV(12%,B4:B13) $ 382,479.77 Present value of OCF $    -300,000 $      -75,000 a NPV $ 7,479.77 b Yes , Positive NPV of $7,479.77 c Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows d IRR(C2:C13) 10.68%

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