Pioneer Agro is considering installing a new extractor and grinding machine whic
ID: 2703847 • Letter: P
Question
Pioneer Agro is considering installing a new extractor and grinding machine which is expected to produce operating cash flows of $73,000 a year for 7 years. At the beginning of the project, inventory will decrease by $16,000, accounts receivables will increase by $21,000, and accounts payable will increase by $15,000. All net working capital will be recovered at the end of the project. The initial cost of the machine is $249,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $48,000 aftertax cash flow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 14.5 percent?
A. $77,211.20
B. $79,418.80
C. $82,336.01
D. $84,049.74
E. $87,925.54
Explanation / Answer
CF0 = -$249,000 + $16,000 - $21,000 + $15,000 = -$239,000
C07 = $73,000 + $48,000 - $16,000 + $21,000 - $15,000 = $111,000
npv=-$239000+$73000*(1-1/(1+0.145)^6)+$111000/(1+0.145)^7=D. $84,049.74