5. (4 points) (Ignore income taxes in this problem.) Nevus Tattoo Parlor is cons

Question

5. (4 points) (Ignore income taxes in this problem.) Nevus Tattoo Parlor is considering a capital budgeting project. This project will initially require a $28,000 investment in equipment and a $3,000 working capital investment. The useful life of this project is 5 years with an expected salvage value of zero on the equipment. The working capital will be released at the end of the 5 years. The new system is expected to generate net cash inflows of $9,000 per year in each of the 5 years. Nevus' discount rate is 14%. The net present value of this project is closest to:

Explanation / Answer

Answer:- The net present value of this project is closest to $1454.

Explanation:-

Net present value of project = Present value of cash inflows – Total outflows

     ={($9000*3.433)+($3000*.519) - $31000}

     =($30897+$1557) - $31000

     = $32454-$31000

     = $1454

Where:-

Total outflows = Initial investment + working capital investment

                         =$28000+$3000

                         =$31000

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