Question

Joanette, Inc., is considering the purchase of a machine that would cost $520,000 and would last for 7 years, at the end of which, the machine would have a salvage value of $52,000. The machine would reduce labor and other costs by $112,000 per year. Additional working capital of $6,000 would be needed immediately, all of which would be recovered at the end of 7 years. The company requires a minimum pretax return of 14% 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.)

Answer 1

Answer:

The present value of the project is  -$10,465.64

Explanation:

The net present value computation for Joannette Inc is set below

In year zero $520,000 and $600 would be incurred on the machine purchase and working capital respectively.

In years 1 to 6 the cash inflow of $112,000 would recorded in respect of reduction in labor costs and other costs

In year 7 ,the cash inflow of $112,000 and recoupment of net working capital would be recorded

NPV=-$526000+($112,000/(1+14%)^1+$112,000/(1+14%)^2+$112,000/(1+14%)^3+$112,000/(1+14%)^4+$112,000/(1+14%)^5+$112,000/(1+14%)^6+$112000+$52000+$6000/(1+14%)^7= ($10,465.64)

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