Question

Green Forest Industrial is considering a project that would last for 3 years and have a cost of capital of 12.74 percent. The relevant level of net working capital for the project is expected to be 17,000 dollars immediately (at year 0); 5,000 dollars in 1 year; 36,000 dollars in 2 years; and 0 dollars in 3 years. Relevant expected operating cash flows and cash flows from capital spending in years 0, 1, 2, and 3 are presented in the following table. What is the net present value of this project?

Answer 1

Net Present Value is the present value of all cash flows depends on the intervals of time between now and cash flow. It is the Present Value of Cash Inflows minus Present Value of Cash Outflows. The following table shows the requirement of working capital and the net change in cash flows of Working Capital of the year.

The discounting rate is 12.74% p.a

Years	Level of WC	Net Change in Cash Flows in WC
0	17000	-17000
1	5000	12000
2	36000	-31000
3	0	36000

Net Present Value = -17000 +12000/1.1274 - 31000/1.1274^2 + 36000/1.1274^3 = $ -17,000 + $10,644 + -$ 24,390 + $ 25,122.8 = -$ 5,622.87