Jefferson Products, Inc., is considering purchasing a new automatic press brake, which costs $300,000 including installation and shipping. The machine is expected to generate net cash inflows of $80,000 per year for 10 years. At the end of 10 years, the book value of the machine will be $0, and it is anticipated that the machine will be sold for $100,000. If the press brake project is undertaken, Jefferson will have to increase its net working capital by $75,000. When the project is terminated in 10 years, there will no longer be a need for this incremental working capital, and it can be liquidated and made available to Jefferson for other uses. Jefferson requires a 12 percent annual return on this type of project and its
marginal tax rate is 40 percent.
a. Calculate the press brake's net present value.
b. Is the project acceptable?
c. What is the meaning of the computed net present value figure?
d. What is the project's internal rate of return?
e. For the press brake project, at what annual rates of return do the net present value and internal rate of return methods assume that the net cash inflows are being reinvested?
a. Initial cash outflow in YEAR 0 = $300,000 + $75,000 = $375,000
Annual operating cash inflows = $80,000
Terminal value: Salvage value $100,000 x (1 - .40 tax rate) = $60,000 (after-tax salvage value) + $75,000 release of working capital = $135,000
Calculation of net present ...
Jefferson Products, Inc - NPV and IRR