D) $163,005; no res desires to buy a new crane and accessories to help move and

Question

D) $163,005; no res desires to buy a new crane and accessories to help move and install moe buildings. The machine sells for $75,000 and requires working capital of $10,000. Its estim useful life is six years and it will have a salvage value of $17,560. Recovery of working cap will be $10,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $20,000. Required ute the net present value at a 12% required rate of return 8) Determine the payback period of the investment. Answer

Explanation / Answer

Total cash out flow = Investment + working capital = 75000 + 10000 = 85000

Annual cash savings are given, hence we need not calculate the cashflows again.

Calculation of NPV

Calculation of Payback Period

By the end of 4th year, we still had a balance of 5000 left to be recovered from 5th year cash flow.

So Payback = 4 + 5000 / 20000 = 4.25 Years

Year CF DF PV 0 -85000 1 -85000 1 20000 0.892857 17857.14 2 20000 0.797194 15943.88 3 20000 0.71178 14235.6 4 20000 0.635518 12710.36 5 20000 0.567427 11348.54 6 47560 0.506631 24095.38 NPV 11190.9

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