A new project involves the purchase of a $9000 food processing machine. The mach

Question

A new project involves the purchase of a $9000 food processing machine. The machine would be depreciated on a straight-line basis over its 3-year useful life to a book value of $300. At the end of the life of the project (at the year 3 point), the machine will be sold for an estimated $700. The project will cause an increase in Sales of $6000 in each of years 1 through 3. It is also expected to enhance efficiencies and reduce operating expenses by $3000 in each of years 1 through 3. The project will require an increase in Accounts Receiveable of $1300 and an increase in Accounts Payable of $600 up front. The project's impact on these accounts is expected to disappear at project end (in year 3). The firm's marginal tax rate is 40%, and its WACC is 12%. The NPV of this project is $_________. Round your final answer to 2 decimal places (example: if your answer is 12.3456, you should enter 12.35).

Please show work so I can see how you came up with your answer.

Explanation / Answer

Definition of 'Net Present Value - NPV' The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. In addition to the formula, net present value can often be calculated using tables, and spreadsheets such as Microsoft Excel. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative. For example, if a retail clothing business wants to purchase an existing store, it would first estimate the future cash flows that store would generate, and then discount those cash flows into one lump-sum present value amount, say $565,000. If the owner of the store was willing to sell his business for less than $565,000, the purchasing company would likely accept the offer as it presents a positive NPV investment. Conversely, if the owner would not sell for less than $565,000, the purchaser would not buy the store, as the investment would present a negative NPV at that time and would, therefore, reduce the overall value of the clothing company.

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