Metals is considering installing a new molding machine which is expected to prod
ID: 2719718 • Letter: M
Question
Metals is considering installing a new molding 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 molding machine is $249,000. 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?
1. 77,211
2. 79,418
3. 82,336
4. 84,049
5. 87,925
Explanation / Answer
Cash Outflow at the beginning = 249000 + 16000 - 21000 +15000 = $ 239000
Cash inflow:-
** Salvage value of net working capital = 21000 -16000 - 15000 = (10000)
NPV = 323050.84 - 239000 = 84050 ( nearest to $ 84049 given in the options mentioned in the question)
The Right answer is Option 4. given in the question i.e., 84049
Conclusion:- NPV = $ 84049.
Years P.V. of Cash inflow 1 - 7 73000 Cumulative P.V Factor @ 14.5% for Seven years = 4.2236 308322.80 (a) 7Th Year 48000 P.V. Factor @ 14.5 for Seventh year = 0.38758 18603.84 (b) 7Th Year (10000)** P.V. Factor @ 14.5 for Seventh year = 0.38758 (3875.80) (c) Total = (a) + (b) - (c) 323050.84