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Jasper Metals is considering installing a new molding machine which is expected to produce operating cash...

Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $70,000 per year for 8 years. At the beginning of the project, inventory will decrease by $28,800, accounts receivables will increase by $27,400, and accounts payable will increase by $19,800. At the end of the project, net working capital will return to the level it was prior to undertaking the new project. The initial cost of the molding machine is $297,000. 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 an aftertax cash flow of $80,000. What is the net present value of this project given a required return of 11.6 percent?

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Expert Solution

NPV $101,286.77

Workings

Tax shield on depreciation is ignored since there is no tax rate mentioned and operating cash flow is directly given.

Year Cost of new
machine		 Operating CF NWC Salvage Net CF
0 -297000 21200 -275800
1 70000 70000
2 70000 70000
3 70000 70000
4 70000 70000
5 70000 70000
6 70000 70000
7 70000 70000
8 70000 -21200 80000 128800
NPV $101,286.77

jeff jeffy answered 10 months ago
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