Dunay Corporation is considering investing 510,000 dollars in a project. The lif

Question

Dunay Corporation is considering investing 510,000 dollars in a project. The life of the project would be 6 years. The project would require additional working capital of 42,000 dollars at the beginning. The annual net income from the project (after subtracting depreciation of 36,000 dollars per year) would be 126,000 dollars. At the end of the third year, additional working capital of 30,000 dollars will be needed in the project. At the end of the project, the plant assets used in the project will be disposed of for 80,000 dollars. Also working capital of 24,000 dollars will be released for use elsewhere at the end of the project. The company uses a discount rate of 12 percent. Required: Should the company undertake this project based on its net present value?

Explanation / Answer

Year 0 1 2 3 4 5 6 Initial investment (510,000) life - 6 yrs workingc capital     (42,000) Annual net income    126,000    126,000    126,000    126,000    126,000    126,000 additional working capital -30000 Disposal of plant 80000 working capital recovery 24000 ADD: Depreciation 36000 36000 36000 36000 36000 36000 Net Cashflow (552,000)    162,000    162,000    132,000    162,000    162,000    266,000 Discount rate-12%                  1 0.89285 0.79719 0.71178 0.63551 0.56742 0.50663 Discounted cash flow (552,000)    144,642    129,145      93,955    102,953      91,922    134,764 NPV(sum of discounted cashflow)     145,380 as the NPV is positive the company should undertake the project.

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