Question

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Joanette, Inc., is considering the purchase of a machine that would cost $550.000 and would last for 6 years, at the end of which, the machine would have a salvage value of $55,000. The machine would reduce labor and other costs by $115,000 per year. Additional working capital of $9,000 would be needed immediately, all of which would be recovered at the end of 6 years. The company requires a minimum pretax return of 12% 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

Initial investment -Puuchase cost - -working capitai - $550.000 ¢ 9000 $ 559.000 Puerent value of cash entlourfueduced cost Reduced cost per yeau - $115.000 Present loalue annuuty factol -- Allt @ay for 6 yrs .: Puesent tatue of sateenus $115,000 x 4111 - $442,765 $ 27,885 puerent toatele Satuage loalue - $55.000 x 0.504 Pecsent value o cookie capilare $ 9000 x 0.507 $4563 Total puesent value $505,213 Net puesent value = Potal puesent value - Pritial investment $505,213 - $ 559.000 - $58,487