Question

Diane Manufacturing is considering investing $500,000 in new equipment with an estimated useful life of 10 years and no salvage value. The equipment is expected to produce $320,000 in cash inflows and $200,000 in cash outflows annually. The company uses straight-line depreciation, and has a 30% tax rate. The desired rate of return on this project is 10%. Calculate the Net Present Value. Net cash flows for years 1-10 (99,000 X $1 present annuity factor) Round to the nearest dollar ______________ Recovery of investment in working capital ($5000,000 X present value of $1 factor) _________ Present value of net cash flows __________ Initial Cash Outlay $500,000 Net Present Value _________ Fill in the blanks

Answer 1

Net cash flows for years 1-10 (99,000 X $1 present annuity factor) Round to the nearest dollar 608,312

(99,000 x 6.14457)

Recovery of investment in working capital ($5000,000 X present value of $1 factor) 1,927,700

(5000,000 x 0.38554)

Present value of net cash flows 2,536,012

(608,312 + 1,927,700)

Net Present Value -2,963,988

(2,536,012 - (500,000 + 5,000,000))

net outflow = capital investment + investment in working capital