Dunay Corporation is considering investing $770,000 in a project. The life of th
ID: 2483296 • Letter: D
Question
Dunay Corporation is considering investing $770,000 in a project. The life of the project would be 11 years. The project would require additional working capital of $27,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $164,000. The salvage value of the assets used in the project would be $37,000. The company uses a discount rate of 18%. (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.
Compute the net present value of the project. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.
Explanation / Answer
Solution:
1) Calculation of Present Value of Cash Outflow (Initial Investment of Project)
Cost of Project
$770,000
Add: Additional Working Capital
$27,000
Total Initial Investment required
$797,000
2) Calculation of Present Value of Expected future Cash Flows
Annual net cash inflows
$164,000
PVIFA (18%, 11)
4.656
Present Value of Net Cash Inflows
(Annual Cash Inflows x PVIFA (18%, 11)
$763,584
Present Value of Salvage Value of Asset
(Salvage Value x PVIF (18%, 11)
$5,994 (37,000*0.162)
Present Value of Working Capital Released
(Working Capital x PVIF (18%, 11)
$4,374 ($27,000*0.162)
Total Present Value of Cash Inflows
$773,952
3) Net Present Value
Net Present Value = Present Value of Cash Inflows – Present Value of Cash Outflows
= $773,952 - $797,000
= - 23,048
Cost of Project
$770,000
Add: Additional Working Capital
$27,000
Total Initial Investment required
$797,000
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