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A new project will require the purchase of an asset priced at $3,000, the asset will...

A new project will require the purchase of an asset priced at $3,000, the asset will require transportation and installation of $500. The project will also require an increase in net working capital of $800 in the initial period which is expected to be recovered in the last year. The after tax salvage of the asset at the end of 4 years is $300. Expected operating cash flows are given in the table below.

year 1 2 3 4
OCF 900 1000 1100 1200

Assuming cost of capital is 5%, what is the net present value of this project?

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Answer #1

Initial investment = Price of asset + installation cost + increase in NWC

Initial investment = 3,000 + 500 + 800

Initial investment = 4,300

Net present value = Present value of cash inflows - present value of cash outflows

Present value = Future value / (1 + rate)^time

Present value = -4300 + 900 / (1 + 0.05)^1 + 1000 / (1 + 0.05)^2 + 1100 / (1 + 0.05)^3 + 1200 / (1 + 0.05)^4 + 800 / (1 + 0.05)^4 + 300 / (1 + 0.05)^4

Present value = -4300 + 857.14286 + 907.02948 + 950.22136 + 987.24297 + 658.16198 + 246.81084

Present value = $306.61

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