Question

Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $74,000 per year for 9 years. At the beginning of the project, inventory will decrease by $35,200, accounts receivables will increase by $30,600, and accounts payable will increase by $22,200. 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 $321,000. 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 $96,000. What is the net present value of this project given a required return of 12.4 percent?

Answer 1

Investment in working capital = increase in accounts receivable - decrease in inventory - increase in accounts payable

Investment in working capital = $30,600 - $35,200 - $22,200 = -$26,800

As the investment in working capital is negative, it means that there is a decrease in working capital at the start of the project, and the working capital is increased again to its original level at the end of the project.

Cash outflow in year 0 = cost of machine - decrease in working capital

Cash inflow in year 0 = operating cash flow + after-tax salvage value of machine - increase in working capital

NPV is calculated using NPV function in Excel

NPV is $118,333