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 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

PVF@14.5% PV 1 73000 0.873 63729 2 73000 0.762 55658.52 3 73000 0.666 48610.06 4 73000 0.582 42454.2 5 73000 0.508 37077.9 6 73000 0.444 32382.45 7 73000 0.387 28281.61 Present value of total inflows 308193.7 Purchase value of molding machine=249000 Salvage value=$48,000 PV of salvage value=$48,000*0.387 $        18,576 Total outflows in machine=$249000-$18,576 $        230,424

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