Question

Firefox Company is considering the following investment proposal: Initial investment: Depreciable assets (straight-line) $36,000 Working capital...

Firefox Company is considering the following investment proposal:

Initial investment:

Depreciable assets (straight-line)

$36,000

Working capital

4,000

Operations (per year for 4 years):

Cash receipts

$25,000

Cash expenditures

11,000

Disinvestment:

Salvage value of equipment

$ 3,000

Recovery of working capital

4,000

Discount rate:

10 percent


Additional information for interest rate of 10 percent and four time periods:

Present value of $1

0.68301

Present value of an annuity of $1

3.16987


What is the net present value for the investment?

Select one:

A. $ 4,781

B. $18,322

C. $44,378

D. $ 9,159

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Homework Answers

Answer #1

Solution :

The Answer is (D). $ 9,159

Working :

NPV = Present Value of Inflows - Net Initial Investent

Cash Flow from Operation per Year = $ 25,000 - $ 11,000

= $ 14,000

(1) Present Value of Cash Flow from Operation = Cumulative PV Factor ( 10% , 4) * Cash Inflow

= 3.16987 * $ 14,000

= $ 44,378

(2) Present Value of Salvage Value = PV Factor ( 10% , 4th Year) * Salvage Value

= 0.68301 * $ 3,000

= $ 2049

(3) Present Value of Recovery of Working Capital = PV Factor ( 10% , 4th Year) * Working Capital

= 0.68301 * $ 4,000

= $ 2,732

Total Present Value = $ 44,378 + $ 2,049 + 2,732

= $ 49,159

Net Present Value = Present Value of All Cash Flow - Initial Investment

= $ 49,159 - $ 36,000 - $ 4,000

NPV = $ 9,159

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