Question

Question 7 4.5 pts Taylor Company is considering the purchase o f a new machine. The machine will cost $247,000 and is expected to last f or 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 o f year eight. In addition, purchasing this machine would require an imm ediate investment of $50,000 in working capital which would be released f or investment elsewhere at the end of the 9 years. The machine is expec ted to have a $10,000 salvage value at the end of 9 years. The machine wil I 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 thi s machine. You will need to use the time value of money table factors posted in carmen to answer this question. To access th ese factors, click modules and then scroll to week 8. Click on the link labeled present & future value table factors. No credit will be award ed for this question using a means other than these table factors to an swer this question.

Answer 1

Year	0	4	8	Total
Initial Investment	$ 2,47,000
Investment in working capital	$     50,000
Maintenace		$ 7,000	$ 30,000
Total Cash Outflow	$ 2,97,000	$ 7,000	$ 30,000
PVIF	1	0.735	0.5403
PV of cash outflow	$ 2,97,000	$ 5,145	$ 16,209	$ 3,18,354

PV of cash inflow

= PV of $50000 cash flow generated by the machine every year + PV of $50000 release of working capital at the end of the 9th year + PV of $10000 salvage value of the machine at the end of the 9th year

= $50,000 x PVIFA(8%, 9) + $50,000 x PVIF (8%, 9) + $10,000 x PVIF (8%, 9) = $50,000 x 6.2469 + $50,000 x 0.5002 + $10,000 x 0.5002 = $3,42,357

NPV of the machine = PV of cash inflow - PV of cash outflow = $3,42,357 - $ 3,18,354 = $24003

Note: As there is no tax therefore depreciation (non cash expense) will have no effect on cash flow as there will be no tax advantage of depreciation.