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 $900.  At the end of the life of the project (at the year 3 point), the machine will be sold for an estimated $300.  The project will cause an increase in Sales of $7000 in each of years 1 through 3.  It is also expected to enhance efficiencies and reduce operating expenses by $1000 in each of years 1 through 3.  The project will require an increase in Accounts Receivable of $900 and an increase in Accounts Payable of $1000 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)..

Explanation / Answer

Initial Cost of Machine = 9000

Working capital required = 1000+900 = 1900

Initial Investment required = 9000+1900 = 10900

Depreciation = (9000-900)/3 = 2700

Annual Cash flow = (7000+1000)*0.60 + 2700*0.40 = 5880

After tax salvage Value = 300 - (300-900)*0.40 = 540

Working Capital realised at the end = 1900

Terminal value = 540+1900 = 2440

NPV = 5880/1.12 + 5880/1.12^2 + 5880/1.12^3 + 2440/1.12^3 - 10900

NPV = $ 4959.51

Answer:

The NPV of this project is $ 4959.51

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