Question

Dowlen, Inc., is considering the purchase of a machine that would cost $150,000 and would last for 6 years.At the end of 6 years, the machine would have a salvage value of $23,000.The machine would reduce labor and other costs by $36,000 per year.Additional working capital of $6,000 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 12% on all investment projects.The net present value of the proposed project is closest to:_______.
A) $9,657
B) $(2,004)
C) $6,699
D) $13,223

Answer 1

Answer:

C) $6,699

Explanation:

The net present value is determined by following the steps below :

Step 1 : Determine the Cash flow and timing

Year 0 =  ($156,000) that is $150,000 - machine cost + $6,000 - working capital

Year 1  = $36,000

Year 2  = $36,000

Year 3  = $36,000

Year 4  = $36,000

Year 5  = $36,000

Year 6  = $65,000 that is $36,000 + $23,000 - salvage value  + $6,000 - working capital.

Step 2  : Determine the NPV

Using the CFj Function of a financial calculator, we can calculate the net present value as follows :

($156,000) CF 0

$36,000      CF 1

$36,000      CF 2

$36,000      CF 3

$36,000      CF 4

$36,000      CF 5

$65,000      CF 6

i/yr = 12%

Shift NPV give $6,702.97

Therefore,

The net present value of the proposed project is closest to $6,699