Question

# (Ignore income taxes in this problem.) Nevus Tattoo Parlor is considering a capital budgeting project. This...

(Ignore income taxes in this problem.) Nevus Tattoo Parlor is considering a capital budgeting project. This project will initially require a \$27,000 investment in equipment and a \$3,000 working capital investment. The useful life of this project is 7 years with an expected salvage value of zero on the equipment. The working capital will be released at the end of the 7 years. The new system is expected to generate net cash inflows of \$9,000 per year in each of the 7 years. Nevus' discount rate is 14%. The net present value of this project is closest to:

CASH INFLOW FOR 7 YEARS = 9000 EACH YEAR

WE USE PVAF (ANNUITY TABLE) FACTOR @ 14 % FOR ITS PRESENT VALUE FOR 7 YEAR

RATE = 4.2883

PRESENT VALUE = 9000 X 4.2883 = 38594

CASH INFLOW FOR WORKING CAPITAL WHICH RELEASED IN 7TH YEAR END

WE USE PVIF FACTOR @ 14 % FOR ITS PRESENT VALUE FOR 7TH YEAR = 0.3996

= 3000 X 0.3996

= 1199

TOTAL CASH INFLOW = 38594+1199 = 39793

NPV = INFLOW - INITIAL INVESTMENT / OUTFLOW

OUTFLOW= 27000+3000 = 30,000

NPV= 39793- 30,000 = 9793