[jty6639]

Can someone please help with this problem.


Sam's Structures desire to buy a new crane and accessories to help move and install modular buildings. The machine sells for $75,000 and requires working capital of $10,000. Its estimated useful life is 6 years and it will have a salvage value of $17,560. Recovery of working capital will be $10,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $20,000.

1. Compute the net present value at a 12% required rate of return.
2. Compute the internal rate of return.
3. Determine the payback period of the investment.

[ArcSine]

Start by laying out your 6 years of cash flows, in order

-85,000; 20K; 20K; 20K; 20K; 20K; 47,560.

The 85K is the immediate outlay, while the 6 positive CFs are assumed to occur at the end of each year. Note that the tie-up of working capital is treated as a cash expenditure, and so is added to the purchase price of the asset.

Similarly, the final cash flow at the end of year 6 includes the release of tied-up working capital, the expected selling price (salvage value), and the final year's cash savings.

For (1), discount all those cash flows using a 12%-per-year discount rate.

(2) is very similar to (1), except that instead of using 12%, you'll use trial-and-error to determine the discount rate that makes the present value of those 6 positive cash flows equal exactly 85,000.

The payback period for (3) is the number of years (including fractional years) it takes for the positive cash flows to exactly "pay back" the initial outlay.

That should give you a bit of a roadmap to get you where you want to go.