(Ignore income taxes in this problem.) Mcclam, Inc., is considering the purchase

Question

(Ignore income taxes in this problem.) Mcclam, Inc., is considering the purchase of a machine that would cost $100,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $23,000. The machine would reduce labor and other costs by $19,000 per year. Additional working capital of $2,000 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 13% on all investment projects. The net present value of the proposed project is closest to: (UseExhibit11B-1,Exhibit11B-2)

Explanation / Answer

Hi, Please find calculations as follows: Initial Investment = 100000 Working Capital Needed = 2000 Annual Savings = 19000 (Year 1 to 9) discounted using Exhibit 11B-2 at 5.132 (13% for 9 years) Salvage Value = 23000 (Year 9) at .333 using Exhibit 11B-1 Working Capital Recovered = 2000 (Year 9) at .333 using Exhibit 11B-1 NPV = -100000 -2000 + 19000*5.132 + 23000*.333 + 2000*.333 = 3833 is the NPV Thanks, Aman

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