Joanette, Inc., is considering the purchase of a machine that would cost $470,000 and would last for 5 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 5 years. The company requires a minimum pretax return of 15% 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.
- - - - - - -(Tables attached below)- - - - - - - -
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.)
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Net present value = present value of annual net cash flow - initial investment
initial investment = $470000 + $3000 = $473000
Present value of annual net cash flow = present value of annual $117000 + present value of salvage value $57000
therefore,
Net present value = ($117000 x 3.35216) + ($57000 x 0.49718) - $473000
= 392202.72 + 28339.26 - $473000
= -$52458
net present value of this project is negative
Where,
PVAF(15%, 5) = 3.35216
PVF(15%, 5) = 0.49718
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