Firefox Company is considering the following investment proposal: Initial invest

Question

Firefox Company is considering the following investment proposal:

Initial investment:

Depreciable assets (straight-line)

$36,000

Working capital

4,000

Operations (per year for 4 years):

Cash receipts

$25,000

Cash expenditures

11,000

Disinvestment:

Salvage value of equipment

$ 3,000

Recovery of working capital

4,000

Discount rate:

10 percent

Additional information for interest rate of 10 percent and four time periods:

Present value of $1

0.68301

Present value of an annuity of $1

3.16987

What is the net present value for the investment?

Select one:

A. $18,322

B. $ 4,781

C. $ 9,159

D. $44,378

Initial investment:

Explanation / Answer

Cash inflows each year for 4 years = Cash receipts - Cash expenditures

= 25,000 - 11,000

= 14,000

Cash inflows in the 4th year = Salvage value of equipment + Recovery of working capital

= 3,000 + 4,000

= 7,000

Present value of cash inflows = (14,000*3.16987) + (7,000*0.68301)

= 44,378.18 + 4,781.07

= 49,159.25

Cash outflows = Depreciable assets + Working capital

= 36,000 + 4,000

= 40,000

Present value of cash outflows = 40,000*1 = 40,000

Net present value = Present value of cash inflows - Present value of cash outflows

= 49,159.25 - 40,000

= 9,159.25

The answer is C.

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