Question

Joanette, Inc., is considering the purchase of a machine that would cost $620,000 and would last for 10 years, at the end of which, the machine would have a salvage value of $62,000. The machine would reduce labor and other costs by $122,000 per year. Additional working capital of $8,000 would be needed immediately, all of which would be recovered at the end of 10 years. The company requires a minimum pretax return of 16% on all investment projects.
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:

$22,484

Explanation:

The computation of net present value of the project is shown below:-

Net present value = Present value of cash inflow - Present value of cash outflow

Net present value = Other cost reduced amount × PVIFA factor at 16% for 10 years + Additional working capital × Discount factor for 10th year + Salvage value × Discount factor for 10th year -  Salvage value + Discount factor for 10th year × 1)

= $122,000 × 4.83322 + $8,000 × 0.2266 + $62,000 × 0.2266 - $62,000 + $8,000 × 1)

= $589,654 + $15,862 - $628,000

= $22,484

Therefore for computing the net present value we simply applied the above formula.