Question

The Apple Company is considering investing in an investment that requires $100,000 plus an increased working...

The Apple Company is considering investing in an investment that requires $100,000 plus an increased working capital of $10,000. The investment has a 4-year life. Annual after-tax cash flows from operations will be $40,000 for each of the 4-year .The working capital will be released at the end of the 4th year. What is the net present value of the investment if the required rate of return is 12%?

The present value of a single amount over four years at 12% is 0.6355.

The present value of an annuity over four years at 12% is 3.0373.

Group of answer choices

$16,758

$17,849

$27,849

$40,992

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Answer #1

The correct option is C i.e 27,849.

Net present value = Present value of inflow - Initial investment

Net present value = 1,27,849 - $1,00,000

Net present value = $27,849

Year Cash flow Required return @12% Present value of cash inflow
1 40,000 0.89285714285 35,714
2 40,000 0.79719387754 31,888
3 40,000 0.7117802478 28,471
4 40,000 0.63551807839 25,421
4 10,000 0.63551807839 6355
1,27,849

Note: Working capital is always assumed to be recovered in the end of a life of project.

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