Anne, Inc., is considering the purchase of a machine that would cost $200,000 an

Question

Anne, Inc., is considering the purchase of a machine that would cost $200,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $46,000. The machine would reduce labor and other costs by $31,000 per year. Additional working capital of $7,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 8% on all investment projects.

What is the combined present value of the working capital needed at the beginning of the project and the working capital released at the end of the project?

Explanation / Answer

The combined present value of the working capital needed at the beginning of the project is $200,000 + $7,000 = $207,000 The working capital released at the end of the project is 8*$31,000 +$46,000 = $294,000

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