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Calculating NPV and IRR for the given project

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Janes, Inc. is considering the purchase of a machine that would cost $430,000 and would last for 6 years, at the end of which, the machine would have a salvage value of $47,000. The machine would reduce labor and other costs by $109,000 per year. Additional working capital of $4,000 would be needed immediately, all of which would be recovered at the end of 6 years. The company requires a minimum pretax return of 17% on all investment projects. (Ignore income taxes in this problem.)

Required:

(a) Determine the net present value of the project.

(b) Calculate the IRR for this project.

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Solution Summary

Solution calculates NPV and IRR in the given case.

Solution Preview

Please refer attached file for better clarity of tables and formulas.

Solution

Cost of Machine=Po=$430,000.00
Salvage Value=S=$47,000.00
Savings in labor and other costs=OS=$109,000.00
Additional Capital required=W=$4,000.00
Cost of capital=17%

Let us summarize the problem.

Year End Cost of machine Cost savings Additiona working capital Salvage Value Net cash flow PV @17%
n Po OS WC S ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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