(Ignore income taxes in this problem.) Dokes, Inc. is considering the purchase of a machine that would cost $440,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $62,000. The machine would reduce labor and other costs by $81,000 per year. Additional working capital of $8,000 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 13% on all investment projects. The net present value of the proposed project is closest to:

Question

Quizplus · Accepted Answer

To calculate the NPV, we first need to calculate the annual cash flows in each of the 9 years:

Annual cash inflows = Labor and other cost savings - Depreciation expense
Annual cash inflows = $81,000 - (($440,000 - $62,000) / 9)
Annual cash inflows = $81,000 - $36,000
Annual cash inflows = $45,000

Year 0:
Initial investment = -$440,000 - $8,000 (working capital)
Year 0 cash flow = -$448,000

Year 1-9:
Cash flow = $45,000

Year 9:
Salvage value = $62,000
Year 9 cash flow = $62,000 + $45,000 (last year's cash flow) = $107,000

Now, we can calculate the NPV using a discount rate of 13%:

NPV = -$448,000 + ($45,000 / 1.13) + ... + ($107,000 / (1.13)^9)
NPV = -$8,998.06

Since the NPV is negative, the project should not be accepted.

(Ignore Income Taxes in This Problem