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 $2,000 would be needed immediately, all of which would be recovered at the end of 9 years. The company requires a minimum pretax return of 12% on all investment projects. (Ignore income taxes.)
Click here to view Exhibit 12B-1 and Exhibit 12B-2 to determine the appropriate discount factor(s) using the tables provided.
Required:
Determine the net present value of the project. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount.)
Homework Answers
Answer:
| Particulars | Year(s) | Cash flow Amount($) | 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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