Question

A project will produce an operating cash flow of $283,000 a year for four years. The initial cash outlay for equipment will be $631,000. An aftertax salvage value of $42,000 for the equipment will be received at the end of the project. The project requires $56,000 of net working capital that will be fully recovered. What is the net present value of the project if the required rate of return is 16 percent?

$166,218.32

$159,009.65

$151,870.15

$143,218.96

$137,642.18

Answer 1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

= 283000/1.16+283000/1.16^2+283000/1.16^3+283000/1.16^4+42000/1.16^4+56000/1.16^4

=283000[1/1.16+1/1.16^2+1/1.16^3+1/1.16^4]+42000/1.16^4+56000/1.16^4

=(283000*2.798180638)+(42000*0.552291097)+(56000*0.552291097)

=$846,009.65

Present value of outflows=631000+56000

=$687000

NPV=Present value of inflows-Present value of outflows

=$846,009.65-$687000

=$159,009.65(Approx).