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Hampton’s Wheels is considering a new project that will generate OCFs of 393,458 over the 4...

Hampton’s Wheels is considering a new project that will generate OCFs of 393,458 over the 4 year life of the project. The project will require $1,423,725 of new equipment that can be sold for 20% of initial cost (consider this an after-tax figure) and will require an investment in net working capital of $87,588. If Hampton has a require return of 6, what is the npv for this project?

(Round Your Answer to the nearest dollar (Ex 123,456 instead of 123.455.68)

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Answer #1

Initial investment :-

Cost of new equipment = $ 1,423,725

Add- increase in working capital = $ 87,588

Intial investment = $ 1,423,725 + 87,588 = $ 1,511,313.

After tax salvage value = 20% of initial cost = 20% * 1,423,725 = $ 284,745.

Present value of cash inflows:-

Particulars year 1 year 2 year 3 year 4
OCF 393,458 393,458 393,458 393,458
Salvage value 284,745
Recovery of working capitL 87,588
Total cash flows 393,458 393,458 393,458 765,791
PV F @6% 0.9434 0.8900 0.8396 0.7921
Present value of cash inflows 371,188.277 350,177.62 330,347.337 606,583.051

Present value of cash inflows = 371,188.277 + 350,177.62 + 330,347.337 + 606,583.051 = $ 1,658,296.29

NPV = present value of cash inflows - initial investment

NPV = 1,658,296.29 - 1,511,313 = $ 146,983.29

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