Question 5 Kanzler Corporation is considering a capital budgeting project that w

Question

Question 5

Kanzler Corporation is considering a capital budgeting project that would require an initial investment of $450,000 and working capital of $25,000. The working capital would be released for use elsewhere at the end of the project in 4 years. The investment would generate annual cash inflows of $143,000 for the life of the project. At the end of the project, equipment that had been used in the project could be sold for $10,000. The company’s discount rate is 14%. The net present value of the project is closest to:.

      
$(27,521)
      
$(37,721)
      
$(52,521)
      
$132,000

Explanation / Answer

PV Factor

= 1 / (1 + r) ^ n

Where,

r = Rate of interest = 14% or 0.14

n = Years 1 to 4

So, PV Factor for year 2

= 1 / 1.14 ^ 2

= 1 / 1.2996

= 0.769467

Other calculations are shown in the following table

So, option B is closest to the NPV of the project

Calculations Years 0 1 2 3 4 A Initial Investment (450,000)                  -                    -                    -          10,000 B Working capital     (25,000)                  -                    -                    -          25,000 C Annual cash flows                 -        143,000      143,000      143,000      143,000 D = A+B+C Net Cash Flows (475,000)      143,000      143,000      143,000      178,000 E PV Factor 1.000000    0.877193    0.769468    0.674972    0.592080 F = D x E Present Value (475,000)      125,439      110,034        96,521      105,390 G = Sum F Net Present Value     (37,616)

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