question #29 Note: This is a question form the capital budgeting chapter! Assume
ID: 2645224 • Letter: Q
Question
question #29
Note: This is a question form the capital budgeting chapter!
Assume that you are looking at an investment opportunity that offers an annual operating cash flow of $40,000 per year for 4 years. The initial investment to purchase the necessary equipment is $200,000. You assume that you can sell the equipment at the end of 4 years for $70,000. Also, initially there is a need for an investment in net working capital of $15,000, but this increases to $35,000 in year 1. If your required rate of return is 5% and the tax rate is 35%, what is the NPV?
Note: This is a question form the capital budgeting chapter!
Assume that you are looking at an investment opportunity that offers an annual operating cash flow of $40,000 per year for 4 years. The initial investment to purchase the necessary equipment is $200,000. You assume that you can sell the equipment at the end of 4 years for $70,000. Also, initially there is a need for an investment in net working capital of $15,000, but this increases to $35,000 in year 1. If your required rate of return is 5% and the tax rate is 35%, what is the NPV?
Explanation / Answer
NPV = -200000 - 15000 - 20000/1.05 + 40000*(1-(1+.05)^-4)/.05 + 35000/1.05^4 + 70000/1.05^4
= -5825
Correct option:
No, because the NPV is -$5,825.84
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.