Question

J. Renner Inc. has been offered a four-year contract to supply parts for a local business. The cash flow information for the project is detailed below:

Cost of equipment	$250,000
Working capital required	$20,000
Upgrading equipment in 2 years	$90,000
Salvage value of equipment in 4 years	$10,000
Annual net cash inflow	$120,000

The working capital would be released at the end of the contract in 4 years. The cost of capital is 14%. Compute the NPV of the project:

Cash Flow Description	Cash Flow	PV Factor	PV of Cash Flow
Cost of equipment
Working capital required
Upgrading equipment in 2 years
Salvage value of equipment in 4 years
Annual net cash inflow
Release of working capital
Total NPV

Answer 1

Cash Flow Description	Cash flow ($)	PV Factor	PV of Cash Flow ($)
Cost of equipment	(250,000)	1.0000000	(250,000.00)
Working capital required	(20,000)	1.0000000	(20,000.00)
Upgrading equipment in 2 years	(90,000)	0.7694675	(69,252.08)
Salvage value of equipment in 4 years	10,000	0.5920803	5,920.80
Annual net cash inflow	120,000	2.9137123	349,645.48
Release of working capital	20,000	0.5920803	11,841.61
NPV of the project			28,155.81