Question

A project will produce an operating cash flow of $385,000 a year for three years. The...

A project will produce an operating cash flow of $385,000 a year for three years. The initial cash outlay for equipment will be $850,000. The net aftertax salvage value of $50,000 will be received at the end of the project. The project requires $72,000 of net working capital up front that will be fully recovered. What is the net present value of the project if the required rate of return is 14 percent?

$45,915.26

$51,208.72

$59,612.87

$54,174.86

$47,320.15
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Answer #1

Net Present Value [NPV] of the Project = $54,174.86

Calculations

Net Present Value [NPV] = Present value of total cash inflows – Initial Investment

Present value of total cash inflows = Present value of operating cash flows + Present value of salvage value + Present Value of Working capital released

= $385,000 [PVIFA 14%, 3 Years] + $50,000[PVIF 145, 3 Year] + $72,000[PVIF 14%,3Year]

= [$385,000 x 2.32163] + [$50,000 x 0.67497] + [$72,000 x 0.67497]

= $89,3828.33 + 33,748.58 + 48,597.95

= $976,174.86

Initial Investment = Equipment cost + Working Capital

= $850,000 + 72,000

= $922,000

Net Present Value [NPV] = Present value of total cash inflows – Initial Investment

= $976,174.86 – 922,000

= $54,174.86

“ Hence, The answer is $54,174.86 “

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