Question

TB Problem Qu. 13-156 Joanette, Inc., is considering the purchase...

Joanette, Inc., is considering the purchase of a machine that would cost $410,000 and would last for 5 years, at the end of which, the machine would have a salvage value of $41,000. The machine would reduce labor and other costs by $101,000 per year. Additional working capital of $3,000 would be needed immediately, all of which would be recovered at the end of 5 years. The company requires a minimum pretax return of 13% on all investment projects. (Ignore income taxes.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using the tables provided.

Required:

Determine the net present value of the project. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Answer 1

Computation of Cash flows:

Year 0:

Initial investment = Purchase cost of machine + working capital

                            = $ 410,000 + $ 3,000 = $ 413,000

Year 1 through 4:

Cash flow = Cost savings = $ 101,000

Year 5:

Cash flow = Cost savings + Salvage value + Working capital

                = $ 101,000 + $ 41,000 + $ 3,000 = $ 145,000

Computations of NPV:

NPV = PV of cash in-flows – Initial investment

Year	Cash flow (C)	PV Factor @ 13 % (F)	PV (= C x F)
0	($413,000)	1	($413,000)
1	$101,000	0.88496	$89,381
2	$101,000	0.78315	$79,098
3	$101,000	0.69305	$69,998
4	$101,000	0.61332	$61,945
5	$145,000	0.54276	$78,700
		NPV	$ (33,878)

Net present value of the project is - $ 33,878