Question

Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $55,000 per year for 7 years. At the beginning of the project, inventory will decrease by $16,000, accounts receivables will increase by $21,000, and accounts payable will increase by $15,000. 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 $249,000. 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 $48,000. What is the net present value of this project given a required return of 9.9 percent?

A. $48,746

B. $56,525

C. $59,426

D. $47,504

E. $47,129

Answer 1

A is the best option.

Working capital change = (-16000+21000-15000) = -10000

This means there is a decrease in working capital initially.

Cash flows are as follows

Year	Initial cash flow	Operating cash flows	Working capital	Salvage	Net cash flow
0	($249,000.00)		10000		($239,000.00)
1		55000			$55,000.00
2		55000			$55,000.00
3		55000			$55,000.00
4		55000			$55,000.00
5		55000			$55,000.00
6		55000			$55,000.00
7		55000	-10000	48000	$93,000.00

NPV is $49271.45 using NPV function in excel.

Hence the best and closest option is A.

WORKINGS