Question

J. Renner Inc. has been offered a four-year contract to supply parts for a local business....

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
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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
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