A new molding machine is expected to produce operating cash flows of $109,000 a year for 4 years. At the beginning of the project, inventory will decrease by $8,700, accounts receivables will increase by $9,500, and accounts payable will decrease by $5,200. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $319,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. No bonus depreciation will be taken. The equipment will be salvaged at the end of the project creating an aftertax cash inflow of $51,600. What is the net present value of this project given a required return of 14.2 percent?
A) $25,162.45
B) $24,061.87
C) $28,336.01
D) $22,863.16
E) $27,925.54

Question

A new molding machine is expected to produce operating cash flows of $109,000 a year for 4 years. At the beginning of the project, inventory will decrease by $8,700, accounts receivables will increase by $9,500, and accounts payable will decrease by $5,200. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $319,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. No bonus depreciation will be taken. The equipment will be salvaged at the end of the project creating an aftertax cash inflow of $51,600. What is the net present value of this project given a required return of 14.2 percent?
A) $25,162.45
B) $24,061.87
C) $28,336.01
D) $22,863.16
E) $27,925.54

Quizplus · Accepted Answer

1. Calculate the annual cash flows: $109,000
2. Calculate the initial outflow: -$319,000
3. Calculate the salvage value: $51,600
4. Calculate the changes in net working capital: 
    -$8,700 + $9,500 - $5,200 = -$4,400 at t=0
    $8,700 - $9,500 + $5,200 = $4,400 at t=4
5. Calculate the annual depreciation: $319,000/4 = $79,750
6. Calculate the taxable income:
   Year 1: $109,000 - $79,750 = $29,250
   Year 2: $109,000 - $79,750 = $29,250
   Year 3: $109,000 - $79,750 = $29,250
   Year 4: $109,000 - $79,750 + $51,600 = $80,850
7. Calculate the taxes:
   Year 1-3: 40% x $29,250 = $11,700
   Year 4: 40% x $80,850 = $32,340
8. Calculate the after-tax cash flows:
   Year 0: -$319,000 - (-$4,400) = -$314,600
   Year 1: $109,000 - $11,700 = $97,300
   Year 2: $109,000 - $11,700 = $97,300
   Year 3: $109,000 - $11,700 = $97,300
   Year 4: $109,000 - $32,340 + $51,600 = $128,260
9. Calculate the present value of each cash flow:
   Year 0: -$314,600/1.142^0 = -$314,600
   Year 1: $97,300/1.142^1 = $78,733.43
   Year 2: $97,300/1.142^2 = $68,293.27
   Year 3: $97,300/1.142^3 = $59,650.09
   Year 4: $128,260/1.142^4 = $83,809.16
10. Calculate the net present value: -$314,600 + $78,733.43 + $68,293.27 + $59,650.09 + $83,809.16 = $25,162.45
Therefore, the net present value of this project is $25,162.45, which is option A.

A New Molding Machine Is Expected to Produce Operating Cash