Answer:
The NPV of the project is -$68,870
Explanation:
- We have the cash flows from the investment and its timing as listed below:
+ Year 0 : - (Initial Machine investment cost + working capital) = -$573,000;
+ Year 1 - Year 8, each year: Labor and other cost reduction = $117,000;
+ Year 9: Labor and other cost reduction + Working capital recovery = 117,000 + 3,000 = $120,000.
- Thus, net present value of the project is all the above cash flows discounted at required rate of return 18%, calculated as followed:
-573,000 + [ (117,000/0.18) / ( 1 - 1.18^-8) ] + (120,000/1.18^9) = -$68,870.
- So, the answer is NPV of the project is -$68,870.
