Question

Joanette, Inc., is considering the purchase of a machine that would cost $570,000 and would last for 9 years, at the end of which, the machine would have a salvage value of $57,000. The machine would reduce labor and other costs by $117,000 per year. Additional working capital of $3,000 would be needed immediately, all of which would be recovered at the end of 9 years. The company requires a minimum pretax return of 18% on all investment projects. (Ignore income taxes.)

Joanette, Inc., is considering the purchase of a machine that would cost $570,000 and would last for 9 years, at the end of which, the machine would have a salvage value of $57,000. The machine would reduce labor and other costs by $117,000 per year. Additional working capital of $3,000 would be needed immediately, all of which would be recovered at the end of 9 years. The company requires a minimum pretax return of 18% 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.) Net present value

Answer 1

Attached is the calculation, it is not financially viable to do the replacement.

Cost of Machine 5,70,000.00 Annual Savings 1,17,000.00 Salvage Value 57,000.00 Incremental Depreciation 57,000.00 Depreciable Value 5,13,000.00 Incremental Op Profits 60,000.00 No of Years 9.00 Cash Flows (Income Taxes Ignored) 1,17,000.00 Yearly Depreciation 57,000.00 PVIFA(18%,9Years) 4.30 PV (of Cash Flows) 0.225456 PV (Salvage Value) PV (Working Capital Recovered) 5,03,453.55 CFX PVIFA 12,851.00 CFX DF YO 676.37 CFX DF yng PV (Future Benefits) 5,16,980.92 Initial Cash Outlay 5,73,000.00 NPV -56,019.08