Lebert, Inc., is considering the purchase of a machine that would cost $380,000 and would last for 7 years. At the end of 7 years, the machine would have a salvage value of $49,000. The machine would reduce labor and other costs by $96,000 per year. Additional working capital of $6,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 18% on all investment projects. The combined present value of the working capital needed at the beginning of the project and the working capital released at the end of the project is closest to:
A)$16,872
B)$0
C)($4,116)
D)($13,111)

Question

Quizplus · Accepted Answer

To calculate the present value of the working capital, we need to use the formula:
PV = WC/(1+r)^t
where PV is the present value, WC is the working capital, r is the required rate of return, and t is the time period.

Working capital needed immediately = $6,000
Working capital released at the end of 7 years = $6,000

Now, we need to calculate the present value of both these cash flows:

PV of working capital needed immediately = $6,000/(1+0.18)^0 = $6,000
PV of working capital released at the end of 7 years = $6,000/(1+0.18)^7 = $2,116.16

Therefore, the combined present value of working capital = $6,000 - $2,116.16 = $3,883.84

So, the closest option to this value is option C) ($4,116).