Paragas, Incorporated, is considering the purchase of a machine that would cost $370,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $52,000. The machine would reduce labor and other costs by $96,000 per year. Additional working capital of $4,000 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 19% on all investment projects. (Ignore income taxes.)Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The combined present value of the working capital needed at the beginning of the project and the working capital released at the end of the project is closest to:

Question

Quizplus · Accepted Answer

The present value of the working capital needed at the beginning of the project is a cost, so it's -$4,000 at time 0. This does not need to be discounted as it is already in present value terms. The working capital released at the end of the project is $4,000, but this needs to be discounted back to present value using the 19% rate over 8 years. Using a present value table or formula, the present value factor for 19% over 8 years is approximately 0.24718. Thus, the present value of the $4,000 released at the end of the project is $4,000 * 0.24718 = $988.72. The combined present value is therefore -$4,000 (initial outlay) + $988.72 (recovered working capital in present value terms) = -$3,011.28, which is closest to option A, $(3,004).

Paragas, Incorporated, Is Considering the Purchase of a Machine That