A new project requires an initial investment of $500,000. Revenue and costs in y

Question

A new project requires an initial investment of $500,000. Revenue and costs in year one are forecasted at $200,000 and $100,000, respectively. Both revenue and costs are expected to increase by 6% a year in line with inflation. Profits are taxed at 30%. Working capital in each year consists of inventories of raw materials and is forecasted at 20% of sales in the following year. The project will last five years and the equipment at the end of this period will have no salvage value. The initial investment can be depreciated over the project life using straight-line method. If the nominal opportunity cost of capital is 12%, what is the net present value of this project?

Explanation / Answer

Answer:

Initial Cash outflow: In$ Initial Investment 500000 Working capital 40000 ($200000*20%) Total 540000

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