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Q1. A company is considering purchasing a new machine, at a cost of $50,000. This amount will be written off over 5 years at $10,000 per year. The company will have to increase its accounts receivable by $4,000 in the first year. The disposal value of the machine being replaced is $1,500.

What is the initial working capital investment required?

Q2. Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed of now, it may be sold for $30,000. The new machine will cost $200,000, an additional cash investment in working capital of $60,000 will be required and will last 3 years at which time it will be disposed for $20,000. The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs.

The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 each additional year of use. (For planning purposes these cash flows and are recognized at the end of each year. Income taxes are not considered in this problem.)

What is the net present value (rounded to the nearest thousand) of the investment assuming the required rate of return is 10 percent?

Q3. Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed of now, it may be sold for $30,000. The new machine will cost $200,000, an additional cash investment in working capital of $60,000 will be required and will last 3 years at which time it will be disposed for $20,000. The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs. The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 each additional year of use. (For planning purposes these cash flows and are recognized at the end of each year. Income taxes are not considered in this problem.)

What is the net present value (rounded to the nearest thousand) of the investment assuming the required rate of return is 24 percent?

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