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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 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 Summary

    Solution calculates NPV and IRR in the given case.

    $2.19

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