Question

In: Accounting

Parrish, Inc. is considering the purchase of a machine that would cost $240,000 and would last...

Parrish, Inc. is considering the purchase of a machine that would cost $240,000 and would last for 5 years, at the end of which, the machine would have a salvage value of $48,000. The machine would reduce labor and other costs by $62,000 per year. Additional working capital of $7,000 would be needed immediately, all of which would be recovered at the end of 5 years. The company’s discount rate is 17%

Compute the net present value of the proposed project.  Should the project be accepted or rejected?  Why?

Solutions

Expert Solution

Answer :

The net present value of the proposed project of Parrish Inc is calculated by

Net present value = Present value of cash inflows - present value of cash outflows

Present value of cash inflows

= Present value of annual cash inflows + Present value of salvage value + working capital recovery

Present vlaue of annual cash inflows = Annual reduction of labour and other costs*PVIFA (5 yearss, 17%)

= $62,000 * 3.1993

= $198,357 A

Present value of salvage value = Salvage value * PVIF (5 years, 17%)

= 48,000 * 0.4561

= $21,893 B

Present value of working capital recovery = $7,000*PVIF (5 years, 17%)

= 7,000*0.4561

= $3,193 C

A + B + C = $223,443

Present value of cash outflows = cost of the machine + increase in working capital

'= $240,000 + $7,000

= $247,000

Net present value = $223,443 - $247,000

Net present vlaue = ($23,557)

Conclusion : Parrish Inc should not accept the proposal to purchase the machine as the Net present value of the project is negative.

Kindly Up-vote Thank You !!!

ekkarill92 answered 2 years ago
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