Question

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

Solution:

Additional Working capital calculation
Decrease in inventory	$      -15,000
Increase in Receivables	$        35,000
Increase in Payables	$      -15,000
Increase in Working capital=	$          5,000
Cost of molding machine	$     2,80,000
		Actual	PVIF/PVIFA@20%	PV
Total initial outflow	a	$     -2,85,000	1	$ -2,85,000
Operating cash inflow per year	b	$          75,000
Depreciation per year	c	$          40,000
Cash flow after Depreciation	d=b-c	$          35,000
Add back depreciation	e=c+d or b	$          75,000	3.605	$ 2,70,375
(No tax rate was provided)
Salvage Value (after tax)	f	$          54,000	0.279	$     15,066
Working capital release	g	$            5,000	0.279	$        1,395
NPV				$        1,836