J.B. Enterprises purchased a new molding machine for $85,000. The company paid $
ID: 2736764 • Letter: J
Question
J.B. Enterprises purchased a new molding machine for $85,000. The company paid $8,000 for shipping and another $7,000 to get the machine integrated with the company's existing assets. J.B. must maintain a supply of special lubricating oil just in case the machine breaks down. The company purchased a supply of oil for $4,000. The machine is to be depreciated on a straight-line basis over its expected useful life of 8 years. Which of the following statements concerning the change in working capital is most accurate?
a. The $4,000 paid for oil is added to the initial outlay, offset by the tax savings $1600.
b. The $4,000 may be expensed each year over the life of the project as part of the incremental free cash flows.
c. The $4,000 is added to the initial outlay and recaptured during the terminal year, hence having no impact on the projects NPV or IRR.
d. Even if the $4,000 is fully recovered at the end of the project, the project's NPV and IRR will be lower if the change in working capital is included in the analysis.
Explanation / Answer
d. Even if the $4000 is fully recovered at the end of the project, the projects NPV and IRR will be lower if the change in working capital is included in the analysis.
because, the 4000 is the inventory to be maintained in case in case machinery breakdown, and its inclusion in decision analysis increase cash outlay, but it is recovered at the end of the project .
inclusion in the project analysis, leads to change in NPV, and IRR.
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