Question

1. Moscow Moldings is considering installing a new molding machine which is expected to produce operating cash flows of $75,000 a year for 7 years. At the beginning of the project, inventory will decrease by $15,000, accounts receivable will increase by $35,000, and accounts payable will increase by $15,000. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $280,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $54,000 after- tax cash flow. What is the net present value of this project given a required return of 20 percent?

Answer 1

1). Net Present Value of the project = 1,810.20 or 1,810 (rounding off to a whole number)

Formula 1 2 3 4 5 6 7 Year (n) Capital investment (CI) Operating cash flow (OCF) 0 280000 75000 75000 75000 75000 75000 75000 75000| (decrease in inventory + increase in A/C receivables - increase in A/C Payables) OCF-Inc. in NWC + ASV - CI 1/(1+20%)^n FCF*Discount factor Sum of all PVs Less: Increase in NWC -5000 After-tax salvage value (ASV) Free Cash Flow (FCF) |-285000.00 75000 Discount factor @ 20% 1.000 0.833 PV of FCF -285000 62500.00 NPV 1810.20 75000 0.694 52083.33 75000 0.579 43402.78 75000 0.482 36168.98 75000 0.402 30140.82 75000 0.335 25117.35 5000 54000 134000 0.279 37396.94