J.B. Enterprises purchased a new molding machine for $85,000. The company paid $8,000 for
shipping and another $7,000 to get the machine integrated with the company's existing assets. J.B.
must maintain a supply of special lubricating oil just in case the machine breaks down. The
company purchased a supply of oil for $4,000. The machine is to be depreciated on a straight-line
basis over its expected useful life of 8 years. Which of the following statements concerning the
change in working capital is MOST accurate?
A) The $4,000 may be expensed each year over the life of the project as part of the incremental
free cash flows.
B) The $4,000 is added to the initial outlay and recaptured during the terminal year, hence
having no impact on the projects NPV or IRR.
C) Even if the $4,000 is fully recovered at the end of the project, the project's NPV and IRR will
be lower if the change in working capital is included in the analysis.
D) The $4,000 paid for oil is added to the initial outlay, offset by the tax savings $1600.
C
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