A project will produce operating cash flows of $60,000 a year for four years. Du

Question

A project will produce operating cash flows of $60,000 a year for four years. During the life of the project, inventory will be lowered by $20,000 and accounts receivable will increase by $25,000. Accounts payable will decrease by $10,000. The project requires the purchase of equipment at an initial cost of $200,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $30,000 after-tax cash flow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 12 percent?

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Explanation / Answer

Fin 3322 Investment Decisions Homework 1. NAU is faced with the decision of which word processor to choose. It can buy the Bang word processor, which costs $8,000, and has an estimated annual, year-end maintenance cost of $2,000. The Bang word processor will be replaced at the end of year 4 and have no value at the time (maintenance cost for 4 years). Alternatively, NAU could buy IOU word processor to accomplish the same identical work. The IOU word processor would need to be replaced after three years. IOU costs only $5000, but annual, year-end maintenance costs will be $2500 per machine (for three years). NAU

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