Question

MC algo 6-32 Cash Flows And NPV Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $71,000 per year for 9 years. At the beginning of the project, inventory will decrease by $30,400, accounts receivables will increase by $28,200, and accounts payable will increase by $20,400. 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 $303,000. 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 after tax cash flow of $84,000. What is the net present value of this project given a required return of 11.8 percent? rev: 03_26_2019_QC_CS-164044 Multiple Choice $117,939 $123,300 $131,419 $141,166 $136,224

Answer 1

Answer is $123,300

Initial Investment = $303,000
Useful Life = 9 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $303,000 / 9
Annual Depreciation = $33,666.67

Initial Investment in NWC = Increase in Accounts Receivable - Decrease in Inventory - Increase in Accounts Payable
Initial Investment in NWC = $28,200 - $30,400 - $20,400
Initial Investment in NWC = -$22,600

After-tax Salvage Value = $84,000
Annual Operating Cash Flow = $71,000

Required Return = 11.80%

NPV = -$303,000 + $22,600 + $71,000 * PVA of $1 (11.80%, 9) + $84,000 * PV of $1 (11.80%, 9) - $22,600 * PV of $1 (11.80%, 9)
NPV = -$303,000 + $22,600 + $71,000 * 5.36900 + $84,000 * 0.36646 - $22,600 * 0.36646
NPV = $123,300

NPV of the project is $123,300