Jefferson Products, Inc., is considering purchasing a new automatic press break, which costs $300,000 including installation and shipping. The machine is expected to generate net cash inflows of $80,000 per year for 10 years. At the end of 10 years, the book value of the machine will be $0, and it is anticipated that the machine will be sold for $100,000. If the press brake project is undertaken, Jefferson will have to increase its net working capital by $75,000. When the project is terminated in 10 years, there will no longer be a need for this incremental working capital, and it can be liquidated and made available to Jefferson for other uses, Jefferson requires a 12 percent annual return on this type of project and its marginal tax rate is 40 percent.

a.Calculate the press brake’s net present value
b.Is the project acceptable?
c.What is the meaning of the computed net present value figure?
d.What is the project’s internal rate of return?
e.For the press brake project, at what annual rate of return do the net present value and internal rate of return methods assume that the net cash inflows are being reinvested?

To calculate the net present value (NPV) of the press brake project, we need to discount the future cash flows to their present value. The formula for calculating NPV is:

NPV = Present Value of Cash Inflows - Initial Investment

a. To calculate the present value of cash inflows, we need to discount the annual net cash inflows of $80,000 over a period of 10 years. The formula for calculating present value (PV) is:

PV = Cash Inflow / (1 + Discount Rate)^n

Where:
- Cash Inflow = $80,000
- Discount Rate = 12% (annual return rate required by Jefferson)
- n = number of years (in this case, n = 1 to 10)

Using this formula, we can calculate the present value of each annual cash inflow and sum them up:

Year 1: PV = $80,000 / (1 + 0.12)^1 = $71,429
Year 2: PV = $80,000 / (1 + 0.12)^2 = $63,838
Year 3: PV = $80,000 / (1 + 0.12)^3 = $57,027
...
Year 10: PV = $80,000 / (1 + 0.12)^10 = $21,093

Summing up the present values of all the cash inflows:

PV of Cash Inflows = $71,429 + $63,838 + $57,027 + ... + $21,093

b. The initial investment includes the cost of the machine, installation, and shipping, which is $300,000. Additionally, there is an incremental working capital increase of $75,000. Therefore, the initial investment is $375,000.

c. The net present value (NPV) figure represents the present value of the cash inflows minus the initial investment. A positive NPV indicates that the project is expected to generate more value than the initial investment and would be considered acceptable.

NPV = PV of Cash Inflows - Initial Investment

d. The internal rate of return (IRR) is the discount rate that makes the NPV equal to zero. In other words, it is the rate at which the present value of cash inflows equals the initial investment. To calculate the IRR, we need to find the rate that satisfies the equation:

NPV = 0

This can be done either through trial and error or by using a financial calculator or spreadsheet software.

e. Both the net present value (NPV) and internal rate of return (IRR) methods assume that the net cash inflows are being reinvested at the project's rate of return. In this case, the annual rate of return is 12%.