Dokes, Inc. is considering the purchase of a machine that would cost $440,000 an

Question

Dokes, Inc. is considering the purchase of a machine that would cost $440,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $62,000. The machine would reduce labor and other costs by $81,000 per year. Additional working capital of $8,000 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:
-$8,998
-$27,030
-$24,308
-$3,662

Explanation / Answer

Years Amount 13% Factor Present Value Initial Investment Now (440,000) 1.000 (440,000.00) Annual net cash inflows 1 -to-9 81,000.00 5.132 415,692.00 Working capital invested Now (8,000.00) 1.000 (8,000.00) Working capital released 9        8,000.00 0.333 2,664.00 Salvage value 9      62,000.00 0.333 20,646.00 Net Present Value (8,998.00) 5.132 in 13% was obtain by adding up all the 13 percent factors from years 1 thru 9.

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