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

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).

My answer I got was $6,938.62. Just want to make sure I did the problem right.

Explanation / Answer

NPV =PVof Post Tax cash flow in sales & Operating expenses + PV of Depreciation Tax shield + PV of Post tax salvage value + PV of working capital realised at the end of 3year - Initial investment (including working capital)

=9000(1-0.4)PVIFA(12%,3) + 2900*0.4PVIFA(12%,3) + (700-400*0.4)PVIF(12%,3) + 700PVIF(12%,3) - 9000-700

=$6938.62

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