Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $170,000. The new machine will cost $360,000 and an additional cash investment in working capital of $170,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $130,000 in additional cash inflows during the first year of acquisition and $290,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment, assuming the required rate of return is 6%? Would the company want to purchase the new machine?

Question
Asked Dec 3, 2019
65 views

Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $170,000. The new machine will cost $360,000 and an additional cash investment in working capital of $170,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $130,000 in additional cash inflows during the first year of acquisition and $290,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life.

 

What is the net present value of the investment, assuming the required rate of return is 6%? Would the company want to purchase the new machine?

check_circle

Expert Answer

Step 1

Calculate net present value...

help_outline

Image Transcriptionclose

PV @ 6% Present Value Year Cash Flow -$360,000 1.0000 $130,000 0.9434 -$360,000 0 $122,642 1 $258,100 $290,000 0.8900 2 $290,000 0.8396 $243,484 $264,226 NPV

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Accounting

Related Accounting Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: During 2010, Salem Company spent $1,360,000 in research and development costs. As a result of its R&...

A:  (a) Required journal entries:

question_answer

Q: Ross Company has been in business for several years, during which time it has been profitable. For e...

A: Net Operating loss carryback: Carry back of net operating losses (NOLs) can help provide cash infusi...

question_answer

Q: If the two totals of a trial balance are equal, does it mean that there are no errors in the account...

A: Trial balance: A trial balance is the summary of all the ledger accounts. The trial balance is prepa...

question_answer

Q: Accounting Question

A: Cash Budget: Cash budget involves an estimation of cash receipts and cash payments made during a spe...

question_answer

Q: Revision of Depreciation Equipment with a cost of $611,800 has an estimated residual value of $55,60...

A: a.Determine the amount of the annual depreciationAnnual depreciation = (Equipment cost - Residual va...

question_answer

Q: Stuart Brands, Inc., presents its statement of cash flows using the indirect method. The following a...

A: a.Prepare statemenet of operating activites using direct method: 

question_answer

Q: The total assets and total liabilities (in millions) of Keurig Green Mountain, Inc. and Starbucks Co...

A: Calculate owner's equity for Incorporation K:

question_answer

Q: Give five examples of tangible assets and intangible assets?

A: A physical asset owned by a company whose value can be easily quantified is known as a tangible asse...

question_answer

Q: Discuss the differences between the revenue cycle activities and operations of a typical "brick and ...

A: Brick and motor business refers to the tradional model of business where goods/services are offered ...