Question

Little Abner's is expanding and expects operating cash flows of $37,000 a year for 4 years as a result. This expansion requires $39,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $3,000 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 16 percent? show all work

Answer 1

Initial investment = cost of fixed asset + net working capital

Initial investment = 39,000 + 3,000 = 42,000

Year 3 non operating cash flow = 3000 ( since working capital will be recovered at the end of the project)

NPV = Present value of cash inflows - initial investment

NPV = -42,000 + 37,000 / ( 1 + 0.16)¹ + 37,000 / ( 1 + 0.16)² + 37,000 / ( 1 + 0.16)³ + 37,000 / ( 1 + 0.16)⁴ + 3,000 / ( 1 + 0.16)⁴

NPV = -42,000 + 31,896.552 + 27,497.027 + 23,704.334 + 20,434.771 + 1,656.873

NPV = $63,189.557