Question

Middlefield Motors is considering a project that would last for 3 years and have a cost of capital of 17.12 percent. The relevant level of net working capital for the project is expected to be 20,000 dollars immediately (at year 0); 13,000 dollars in 1 year; 37,000 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?

	Year 0	Year 1	Year 2	Year 3
Operating cash flows (in dollars)	0	61,000	64,000	58,000
Cash flows from capital spending (in dollars)	-107,000	0	0	15,000

Answer 1

Calculation of NPV
Year	Captial	Working captial	Operating cash	Annual Cash flow	PV factor @ 17.12%	Present values
0	(107,000)	(20,000)	-	(127,000)	1.000	(127,000)
1		(13,000)	61,000	48,000	0.854	40,984
2		(37,000)	64,000	27,000	0.729	19,683
3	15,000	70,000	58,000	143,000	0.622	89,011
				Net Present Value		22,678