Question

A project is expected to create operating cash flows of $26,500 a year for four years. The initial cost of the fixed assets is $62,000. 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 12 percent

Answer 1

Answer: $17,395.00

Explanation:

The Net Present Value is the present value of cash inflows less the present value of cash outflows.

When additional net working capital is required, it is usually recouped at the end so the present value is;

= Present value of four payments of $26,500 + present value of additional net working cap - Initial cost - Additional net working cap

= 80,488.45‬ + 3,000 / (1 + 12%)⁴ - 62,000 - 3,000

= $17,395.00

If there are options, pick the figure closest to this as the error is due to rounding off.

Present value of $26,500 = 26,500 * Present value interest factor of annuity, 12%, 4 years

= 26,500 * 3.0373

= $80,488.45