Question

Joanette, Inc., is considering the purchase of a machine that would cost $660,000 and would last for 9 years, at the end of which, the machine would have a salvage value of $56,000. The machine would reduce labor and other costs by $116,000 per year. Additional working capital of $2,000 would be needed immediately, all of which would be recovered at the end of 9 years. The company requires a minimum pretax return of 12% 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.)

EXHIBIT 128-2 Present Value of an Annuity of $1 in Arrears: 11 - Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18EXHIBIT 12B-1 Present Value of $1; 1 | Periods 4% 5% 6% 7% 8% 9% 10% 11% 2% 3% 4% 15% 16% 7% 18% 19% 20% 21% 22% 23% 24% 25%

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Answer:

Particulars Year(s) Cash flow Amount($) PV factor @12% Present value
Purchase of Machine 0                                -6,60,000 1              -6,60,000
Working capital 0                                     -2,000 1                   -2,000
Savings in Annual Cost 1 to 9                                 1,16,000 5.328                6,18,048
Salvage value 9                                    56,000 0.361                   20,216
Working capital recovery 9                                      2,000 0.361                        722
Net present value                 -23,014
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