Question

Joanette, Inc., is considering the purchase of a machine that would cost $610,000 and would last for 7 years, at the end of which, the machine would have a salvage value of $61,000. The machine would reduce labor and other costs by $121,000 per year. Additional working capital of $7.000 would be needed immediately, all of which would be recovered at the end of 7 years. The company requires a minimum pretax return of 11% on all Investment projects. (Ignore income taxes.) Click here to view Exhibit 12B-1 and Exhibit 12B-2 to determine the appropriate discount factor(s) using the tables provided. Required: Determine the net present value of the project. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount.) Net present value

Answer 1

Present Value of Cash Inflow
	Amount	PV Factor @ 11%	Present Value of Amount
Reduction in Labor cost	121000	4.7122	5,70,176
Present value of salvage	61000	0.4817	29,384
Present value of working capital	7000	0.4817	3,372
Total Cash Inflow			6,02,932
Cash Outflow
Cost of Machinery	-610000	1	-6,10,000
Working capital	-7000	1	-7,000
Net Present Value			-14,068