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Managerial Accounting

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Dirt Devil Cleaners: Items Not Relevant with NPV

MGRACT-7E24BR

Dirt Devil Cleaners has been considering the purchase of a new dry-cleaning machine.

The existing machine originally costing \$290,000 may be sold for \$40,000, the current book value, if they get the new machine. The new machine will cost \$350,000 and require an additional cash investment in working capital of \$100,000 which is recovered at the end of the life of the new machine.

The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net \$100,000 in additional after-tax cash inflows during the first year and \$250,000 in years two and three.

The new machine has a three-year life, and \$10,000 disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year.

Which of these facts is NOT relevant to the capital budgeting decision using NPV as the method?

A

the original cost of the existing machine

B

the added working capital needed

C

the timing of the future cash flows

D

the disposal value of the new machine