Question

Taylor Company is considering the purchase of a new machine. The machine will cost $247,000 and is expected to last for 9 years. However, the machine will need maintenance costing $7,000 at the end of year four and maintenance costing $30,000 at the end of year eight. In addition, purchasing this machine would require an immediate investment of $50, 000 in working capital which would be released for investment elsewhere at the end of the 9 years. The machine is expected to have a $10,000 salvage value at the end of 9 years. The machine will be used to generate net cash inflows of $50,000 per year in each of the 9 years. Taylor Company has a cost of capital of 8 %. Calculate the net present value (NPV) of this machine You will need to use the time value of money table factors posted in carmen to answer this question. To access these factors, click modules and then scroll to week 8. Click on the link labeled present & future value table factors. No credit will be awarded for this question using a means other than these table factors to answer this question.

Answer 1

Computation of Present Value of Cash Inflows of Taylor Company Particulars Years 4 0 1 2 3 5 6 7 8 9 (2,47,000.00) Cash Outflows: Initial Payment Maintenance Working Capital (7,000.00) (30,000.00) (50,000.00) 50,000.00 50,000.00 50,000.00 50,000.00 50,000.00 50,000.00 50,000.00 50,000.00 Cash Inflows Annual Inflows Working capital recovered Salvage value 50,000.00 50,000.00 10,000.00 Net Cash Inflow/ (outflow) (A) (2,97,000.00) 50,000.00 Present Value Factors (Table) (B) 1.0000 0.9259 Present Values (AxB)(2,97,000.00) 46,295.00 50,000.00 0.8573 42,867.00 50,000.00 0.7938 39,691.50 43,000.00 50,000.00 50,000.00 50,000.00 20,000.00 0.7350 0.6806 0.6302 0.5835 0.5403 31,606.25 34,029.00 31,508.50 29,174.50 10,805.40 1,10,000.00 0.5003 55,027.50 Net Present Value of Machine 24,004.65 Decision: As the NPV of the project is positive, Project can be accepted Note: Value of NPV maybe not exactly the same due to rounding off

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