Question

Violet Sky Food is considering a project that would last for 3 years and have a cost of capital of 14.24 percent. The relevant level of net working capital for the project is expected to be 17,000 dollars immediately (at year 0); 6,000 dollars in 1 year; 27,000 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?

	Time 0	Year 1	Year 2	Year 3
Operating cash flows (in dollars)	0	72,000	47,000	72,000
Cash flows from capital spending (in dollars)	-164,000	0	0	6,000

Answer 1

Project
Discount rate	14.240%
Year	0	1	2	3
Cash flow stream	-164000	72000	47000	78000
Discounting factor	1.000	1.142	1.305	1.491
Discounted cash flows project	-164000.000	63025.210	36013.180	52316.661
NPV = Sum of discounted cash flows
NPV Project =	-12644.95
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor