Question

A project is expected to create operating cash flows of $22,500 a year for three years. The initial cost of the fixed assets is $50,000. These assets will be worthless at the end of the project. An additional $3,000 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 10%? (remember that the additional net working capital is entered as part of the initial investment and added to the last final cash flow in the third period)

A. $2,208.11
B. $2,954.17
C. $4,306.09
D. $5,208.11
E. $5,954.17

Answer 1

Answer:

D. $5,208.11

Explanation:

Projected cash flow for each year for 3 years = $22,500

Initial cost = $50,000

Additional working capital required = $3,000

Year    Cash flow     PVIF @ 10%  Discounted Value         Total

0         - $50,000       $1               - $50,000                  -$50,000

0         - $3,000          $1               - $3,000                    -$3,000

1          $22,500       0.909           $20,452.5                 $20,452.5

2         $22,500        0.826            $18,525                      $18,525

3         $22,500       0.751             $16,897.5                  $16,897.5  

3          $3,000        0.751               $2,253                      $2,253

Total                                                                                $5,128.00

The nearest value is $5,208 and the difference is due to rounding off.

Correct option is

D. $5,208.11