Question

Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $55,000 per year for 7 years. At the beginning of the project, inventory will decrease by $16,000, accounts receivables will increase by $21,000, and accounts payable will increase by $15,000. At the end of the project, net working capital will return to the level it was prior to undertaking the new project. The initial cost of the molding machine is $249,000. 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 an aftertax cash flow of $48,000. What is the net present value of this project given a required return of 9.9 percent? $56,525 $59,426 $47,129 $47,504 $48,746 why in the examples is accounts receivables negative when calculating initial cash flow ? in the problem it increase yet inventory is not negative

Answer 1

CF0 = -$249,000 + $16,000 - $21,000 + $15,000 = -$239,000

C07 = $55,000 + $48,000 - $16,000 + $21,000 - $15,000 = $93,000

We need to enter the following values in the financial calculator:

Press CF, then press 2nd, CE/C, to clear the CF spreadsheet.

Now, enter CF0 = -$239,000; Press down key, enter C01 = $55,000, press down key, enter F01 = 6; press down key; enter $93,000, press down key(twice).

Now, press NPV, enter I = 9.9%, press down key, then CPT, which gives NPV = $49,271.45

Increasing accounts receivable means there is a use of cash as the cash will be collected later for the sales, which results in the decrease in the cash flow.

Increasing accounts payable is a source of cash, so cash flow increased by that exact amount.

If the supplier reduced its inventory, that would cause its cash flow to increase as the cash would be coming in.