(Ignore income taxes in this problem. )Lebert, Inc. , is considering the purchase of a machine that would cost $380, 000 and would last for 7 years.At the end of 7 years, the machine would have a salvage value of $49, 000.The machine would reduce labor and other costs by $96, 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 18% on all investment projects. 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

To calculate the present value of the working capital, we need to find the present value of the initial investment and the salvage value.

PV of Initial Investment = $6,000 
PV of Salvage Value = $49,000 / (1 + 0.18)^7 = $18,094

Total PV of Working Capital = PV of Initial Investment - PV of Salvage Value 
= $6,000 - $18,094 
= ($12,094)

Since the total present value of the working capital is negative, the best choice is (C), which indicates that Lebert, Inc. will need additional funds to finance the project.

(Ignore Income Taxes in This Problem