A company is adding an additional machine to increase its operating capacity for the next 12 years. As utilization of the new machine ramps up, the company will see changes in revenues, operating costs, taxes, accounts receivable, inventories, accounts payable and other elements of net working capital. For each year during the project, expectations are detailed below:
• Revenue will be $100,000
• Variable costs will be 60% of revenue
• Fixed costs (including depreciation expense) will be $30,000
• Depreciation expense caused by the new machine will be $5,000
• Accounts receivable will increase by $8,000
• Inventory will increase $9,000
• Accounts payable will increase $6,000
• Accrued expenses will increase $2,000
• The effective tax rate is 30%

During year 6 of the project, the machine will require a major overhaul, which will cost $10000. This investment will extend the useful life of the machine until the final year of the project (year 12). No other factors change, and at the end of year 12, the machine will have no salvage value, so there is no terminal value involved. If the initial investment is $16,000 and the required rate of return is 9%, what is the net present value of this proposal?

Answer rating: 100% (QA)

Heres how to calculate the net present value NPV of the proposal 1 Calculate annual operating cash flows Start with the revenue of 100000 each year Su... View the full answer