Question

As of January 1, 2018, Network Corporation will be purchasing new equipment at a cost of $400,000 for a special 6 year production contract. Network will need an additional $50,000 to cover working capital needs. At the end of the project the working capital will be released. The investment will generate annual cash inflows of $90,000 for the life of the project. At the end of the project, it is estimated that the equipment can be sold for $30,000. The company's discount rate is 6%. The net present value of the project is _______.

	A.	$63,680
	B.	$48,930
	C.	$13,680
	D.	$98,930

Answer 1

Initial Investment = $400,000
Life of Project = 6 years
Initial NWC required = $50,000
Annual Cash Inflows = $90,000
Salvage Value = $30,000
NWC recovered = $50,000
Discount Rate = 6%

NPV = -$400,000 - $50,000 + $90,000 * PVA of $1 (6%, 6) + $30,000 * PV of $1 (6%, 6) + $50,000 * PV of $1 (6%, 6)
NPV = -$450,000 + $90,000 * (1 - (1/1.06)^6) / 0.06 + $80,000 / 1.06^6
NPV = -$450,000 + $90,000 * 4.917 + $80,000 * 0.705
NPV = $48,930

So, NPV of this project is $48,930