Question

Orange Valley Recycling is considering a project that would last for 3 years and have a cost of capital of 15.69 percent. The relevant level of net working capital for the project is expected to be 16,000 dollars immediately (at year 0); 8,000 dollars in 1 year; 39,000 dollars in 2 years; and 0 dollars in 3 years. Relevant expected operating cash flows and cash flows from capital spending in years 0, 1, 2, and 3 are presented in the following table. What is the net present value of this project?

	Time 0	Year 1	Year 2	Year 3
Operating cash flows (in dollars)	0	74,000	62,000	71,000
Cash flows from capital spending (in dollars)	-159,000	0	0	8,000

Answer 1

		Time 0	Year 1	Year 2	Year 3
i	Operating cash flows (in dollars)	0	74,000	62,000	71,000
ii	Cash flows from capital spending (in dollars)	-159,000	0	0	8,000
iii	Net working capital	16,000	8,000	39000	0
iv	Incremental net working capital	-16,000	8,000	-31,000	31,000
v=i+ii+iv	Net cash flow	-175,000	82,000	31,000	110,000
vi	PVIF @ 15.69%	1.0000	0.8644	0.7472	0.6458
vii=v*vi	Present value	(175,000.00)	70,879.07	23,161.68	71,040.37	(9,918.88)
	NPV =	(9,918.88)