Question

Taylor Company is considering the purchase of a new machine. The machine
will cost $247,000 and is expected to last for 9 years. However, the
machine will need maintenance costing $7,000 at the end of year four
and maintenance costing $30,000 at the end of year eight. In addition,
purchasing this machine would require an immediate investment of $50,000
in working capital which would be released for investment elsewhere at
the end of the 9 years. The machine is expected to have a $10,000 salvage
value at the end of 9 years. The machine will be used to generate net cash
inflows of $50,000 per year in each of the 9 years. Taylor Company has a
cost of capital of 8%.

Calculate the net present value (NPV) of this machine.

You will need to use the time value of money table factors posted in
carmen to answer this question. To access these factors, click modules
and then scroll to week 8. Click on the link labeled present & future
value table factors. No credit will be awarded for this question using
a means other than these table factors to answer this question.

Answer 1

Note : The time value of money factors to be used in the solution are not provided with the question. To solve the question, I have used time value factors up to 5 decimal places. If the time value factors to be used in the question are different from the one used in the solution, rounding off difference may be there in the question.

Cost of Machine = $247,000

Salvage value of machine at end of 9 years = $10,000

Life of machinery = 9 years

Maintenance cost = $7,000 at end of four year, and $30,000 at the end of year eight

Working capital requirement = $50,000

Cost of capital = 8%

Annual cash inflow = $50,000

Present Value of project = PV of Annual Cash Inflows + PV of salvage value of machine + PV of working capital released after 9 years - Cost of machinery - Working capital required - PV of maintenance cost

Present Value of project = ($50,000 * 6.24689) + ($10,000 * 0.50025) + ($50,000 * 0.50025) - $247,000 - $50,000 - [($7000 * 0.73503) + ($30,000 * 0.54027)]

Present Value of project = $312,344.50 + $5,002.50 + $25,012.50 - $247,000 - $50,000 - $21,353.31

Present Value of project = $24,006.19