Managerial Accounting

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Dirt Devil Cleaners: Net Initial Investment


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

The existing machine may be sold for \$40,000 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.

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 zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year.

What is the net initial investment needed to compute the Net Present Value of this new machine?