Question

Janes, Inc. is considering the purchase of a machine that would cost $620,000 and would last for 10 years, at the end of which, the machine would have a salvage value of $62,000. The machine would reduce labor and other costs by $122,000 per year. Additional working capital of $8,000 would be needed immediately, all of which would be recovered at the end of 10 years. The company requires a minimum pretax return of 16% on all investment projects. (Ignore income taxes.)

Determine the net present value of the project.

Answer 1

	Year	Value Flows	Present Factor @ 16%	Present Value
		(i)	(ii)	(i) X (ii)
Initial Cost	0	$   -6,20,000	1	$       -6,20,000
Working Capital	0	$         -8,000	1	$             -8,000
Cash Inflows	1-10	$     1,22,000	4.833	$         5,89,626
Salvage Value	10	$         62,000	0.227	$            14,074
Working capital	10	$           8,000	0.227	$               1,816
Net Present Value				$           -22,484
Net Present Value of the projcet is -$22,484