Joanette, Inc., is considering the purchase of a machine that would cost $240,000 and would last for 5 years, at the end of which, the machine would have a salvage value of $48,000. The machine would reduce labor and other costs by $62,000 per year. Additional working capital of $7,000 would be needed immediately, all of which would be recovered at the end of 5 years. The company requires a minimum pretax return of 17% on all investment projects. (Ignore income taxes.)Refer to Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Determine the net present value of the project.
What will be an ideal response?
| Year | |||||||||
| Now | 1-5 | 5 | |||||||
| Initial investment | $ | (240,000 | ) | ||||||
| Working capital | $ | (7,000 | ) | $ | 7,000 | ||||
| Annual net cash flow | $ | 62,000 | |||||||
| Salvage value | $ | 48,000 | |||||||
| Total cash flows (a) | $ | (247,000 | ) | $ | 62,000 | $ | 55,000 | ||
| Discount factor (17%) (b) | 1.000 | 3.199 | 0.456 | ||||||
| Present value of cash flows (a) × (b) | $ | (247,000 | ) | $ | 198,338 | $ | 25,080 | ||
| Net present value | $ | (23,582 | ) | ||||||
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