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Paragas, Inc., is considering the purchase of a machine that would cost $370,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $52,000. The machine would reduce labor and other costs by $96,000 per year. Additional working capital of $4,000 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 19% on all investment projects. (Ignore income taxes.)Refer to Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.The net present value of the proposed project is closest to:

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Answer:

The net present value of the proposed project is close to $19,544.65.

Explanation:

The net present value of the proposed project can be calculated as follows:

Step 1: Calculation of the proposed project's present value of saving of labor and other costs

This can be calculated using the formula for calculating the present value of an ordinary annuity as follows:

PVC = P * ((1 - (1 / (1 + r))^n) / r) …………………………………. (1)

Where;

PVC = Present value of the proposed project of saving of labor and other costs = ?

P = Proposed project's saving of labor and other costs = $96,000

r = required pretax return = 19%, or 0.19

n = number of years of the project = 8

Substitute the values into equation (1), we have:

PVC = $96,000 * ((1 - (1 / (1 + 0.19))^8) / 0.19)

PVC = $379,619.10

Step 2: Calculation of the proposed project's present value of working capital investment recovered at the end of the life of the machine

This can be calculated using the formula for calculating the present value as follows:

PVW = W / (1 + r)^n .......................... (2)

PVW = Present value of proposed project's working capital investment recovered at the end of the life of the machine = ?

W = Proposed project's working capital investment recovered at the end of the life of the machine = $4,000

r = required pretax return = 19%, or 0.19

n = number of years of the project = 8

Substitute the values into equation (2), we have:

PVW = $4,000 / (1 + 0.19)^8

PVW = $994.68

Step 3: Calculation of present value of the machine salvage value

This can be calculated using the formula for calculating the present value as follows:

PVS = W / (1 + r)^n .......................... (3)

PVS = present value of the machine salvage value = ?

W = machine salvage value = $52,000

r = required pretax return = 19%, or 0.19

n = number of years of the project = 8

Substitute the values into equation (3), we have:

PVS = $52,000 / (1 + 0.19)^8

PVS = $12,930.87

Step 4: Calculation of the net present value of the proposed project

Net present value = PVC - Cost of machine - Initial working capital investment + PVW + PVS

Net present value = $379,619.10 - $370,000 - $4,000 + $994.68 + $12,930.87

Net present value = $19,544.65

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