A project will produce operating cash flows of $35,000 a year for three years. T
ID: 2816811 • Letter: A
Question
A project will produce operating cash flows of $35,000 a year for three years. The project requires the purchase of equipment at an initial cost of $84,000 and additional investment in net working capital of $3,500 (which will be fully recovered at the end of project’s life). The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be sold at the end of the project creating a $15,000 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? PLEASE SHOW WORK.
Explanation / Answer
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=35000/1.12+35000/1.12^2+35000/1.12^3+3500/1.12^3+15000/1.12^3
=35000[1/1.12+1/1.12^2+1/1.12^3]+3500/1.12^3+15000/1.12^3
=(35000*2.401831268)+(3500*0.711780247)+(15000*0.711780247)
which is equal to
=$97232.03(Approx)
Present value of outflows=$84000+additional investment in net working capital
=$84000+$3500
=$87500
NPV=Present value of inflows-Present value of outflows
=$97232.03-$87500
which is equal to
=$9732.03(Approx).
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