Janes, Inc., is considering the purchase of a machine that would cost $530,000 a

Question

Janes, Inc., is considering the purchase of a machine that would cost $530,000 and would last for 8 years, at the end of which, the machine would have a salvage value of $43,000. The machine would reduce labor and other costs by $103,000 per year. Additional working capital of $5,000 would be needed immediately all of which would be recovered at the end of 8 years. The company requires a minimum pretax return of 15% on all investment projects. (Ignore income taxes.) Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. Required Determine the net present value of the project. (Negative amount should be indicated by a minus sign Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.) Net present value

Explanation / Answer

Year Amount PV factor Present value Initial investment Now -530000 1 -530000 Working capital Now -5000 1 -5000 Annual cost savings 1-8 103000 4.487 462161 Salvage value 8 43000 0.327 14061 Working capital recovery 8 5000 0.327 1635 Net Present value -57143

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