Question

Bruno's Lunch Counter is expanding and expects operating cash flows of $25,600 a year for 5 years as a result. This expansion requires $69,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $5,800 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 13 percent?

Answer 1

Answer : $18,389.13

Explanation:

Initial investment (C0) = Cost in fixed asset + net working capital

= 69,000 + 5,800

= $74,800

Terminal value (CF2)= net working capital + cash inflow

= 25,600 + 5,800

= 31,400

Using financial calculator (BA 2 plus) to calculate Npv

Step 1: Press CF

Inputs: C0= -74,800

C1= 25,600. Frequency= 4 ( because cash flow is same for four year.

C2= 31,400 Frequency= 1

Step 2: Press NPV

Inputs: I = 13%

Npv= compute

We get, Npv of the project as $18,389.13