Maylar, Inc., is considering the purchase of a machine that would cost $100,000
ID: 2479461 • Letter: M
Question
Maylar, Inc., is considering the purchase of a machine that would cost $100,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $23,000. The machine would reduce labor and other costs by $19,000 per year. Additional working capital of $2,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 13% on all investment projects. Assuming a 13% return, what is the net present value of the proposed project? Round final answer to the nearest dollar. You must use the Annuity table when appropriate to get the correct answer. Should they accept this investment? why or why not?
Explanation / Answer
Year
Years
Amount
13% Factor
PV
Initial Investment
Now
- 100000
1.000
-100000
Working Capital needed
Now
- 2000
1.000
- 2000
Annual costs savings
1 – 9
19000
5.263
99997
Working capital realized
9
2000
0.500
1000
Salvage Value
9
23000
0.500
11500
Net Present Value
$10497
They should accept this investment proposal because net present value is positive. If Maylar, Inc. accept this investment proposal then it will generate net income of $10497.
Year
Years
Amount
13% Factor
PV
Initial Investment
Now
- 100000
1.000
-100000
Working Capital needed
Now
- 2000
1.000
- 2000
Annual costs savings
1 – 9
19000
5.263
99997
Working capital realized
9
2000
0.500
1000
Salvage Value
9
23000
0.500
11500
Net Present Value
$10497