Question

Wet and Wild Water Company drills small commercial water wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below:

Initial investment:

   Depreciable Asset       $160,000

   Additional Working Capital   $20,000

Operations (per year for four years):

   Cash receipts           $160,000

   Cash expenditures       $100,000

Disinvestment:

   Salvage value of drill       $10,000

   (Resulting in additional cash inflow at the end of investment)

Discount Rate               10%

What is the net present value of the investment? Assume there is a recovery of working capital.

1. $20,600

2. $30,657

3. $10,140

4. $30,140

Answer 1

$30,657
Year	0	1	2	3	4
Assets	-$160,000
Additional Working Capital	-$20,000
Salvage value of Drill					$10,000
Recovery of working capital					$20,000
Cash Receipts		$160,000	$160,000	$160,000	$160,000
Cash Expenditures		-$100,000	-$100,000	-$100,000	-$100,000
Net Cash flow	-$180,000	$60,000	$60,000	$60,000	$90,000
Pv Fcator	1	0.909	0.826	0.751	0.683
Discounted Cash flow	-$180,000	$54,546	$49,584	$45,060	$61,470
NPV	$30,657