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Calculating NPV and IRR for the given project

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.

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