In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1, 1997. The following information is being considered by Gunning Industries.
• The new machine would be purchased for $160,000 in cash. Shipping, installation, and testing would cost an additional $30,000.
• The new machine is expected to increase annual sales by 20,000 units at a sales price of $40 per unit. Incremental operating costs are comprised of $30 per unit in variable costs and total fixed costs of $40,000 per year.
• The investment in the new machine will require an immediate increase in working capital of $35,000.
• Gunning uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of five years and zero salvage value.
• Gunning is subject to a 40 percent corporate income tax rate.
Gunning uses the net present value method to analyze investments and will employ the following factors and rates.
Present Value of
an Ordinary
Present Value of Annuity of
Present $1 at 10% $1 at 10%
1 .909 .909
2 .826 1.736
3 .751 2.487
4 .683 3.170
5 .621 3.791

The overall discounted cash flow impact of Gunning Industries' working capital investment for the new production machine would be:

Ans: (13,265)

I was thinking tht working capital will be added to intial investment. Is working capital increment effect all of the yrs ? why they treating final yr Wok Cap as inlow.

PLZZZZZZZZZZ explain!!

thanks

Thanks a ton!!!!! so tht means we hv increase in working capital in 1st yr like employees salary for the period of project. in 6 th yr , when the project is completed ,we no longer need tht expense and we are saving 35k in tht period.  Is tht the case??

thanks again

Amita 

I am using Becker and having an issue regarding to Discounted Cash Flow (DCF) and NPV.

B3-16 - The limitation of DCF uses a simple constant growth (single interest rate) assumption.  This assumption is unrealistic.

B3-25 - The advantage of NPV is flexible and can be used when there is no constant rate of return required for each year of the project.

I thought both are discounting cash flows to PV.  Why DCF only use single interest rate but NPV can have different rates?

Thanks!!