Question

Question. Marie's Fashions is considering a project that will require $28,000 in net working capital and initial investment of$87,000 in fixed assets. The ~project is expected to produce annual sales of $75,000 with associated costs of $57,000. The project has a 5-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 30 percent. The required rate of return for the project is 12%.

What is the operating cash flow for this project in year 1?

What is the project's operating cash flow in year 5?

What is the net present value (NPV) of this project for the five year life?

Answer #1

1) operating cash flow in year 1 = [$75,000 - $57,000) * (1-0.30)] + [($87000 / 5 years) * (0.30)]

= 12600 + 5220

=$17820

2) project's operating cash flow in years 5 = $17820 + $28,000 net working capital

= $45820

3) NPV = present value of cash inflow - persent value of cash outflow

= [17820 * PVAF(12%,4years) + 45820* PVF(12%, 5year) ] - [$28000 + $87000]

= [17820 * 3.037 + 45820 * 0.567 ] - 115000

= [54119.34 + 25979.94] - 115000

= 80099.28- 115000

= (34900.72)

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