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Bruno's Lunch Counter is expanding and expects operating cash flows of $30,100 a year for 6...

Bruno's Lunch Counter is expanding and expects operating cash flows of $30,100 a year for 6 years as a result. This expansion requires $95,400 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $7,400 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 12 percent?

  • $30,716

  • $32,910

  • $34,738

  • $28,353

  • $24,702

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Answer #1

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

=30100/1.12+30100/1.12^2+.............+30100/1.12^6+7400/1.12^6[Net working capital will be released at end of project]

=30100[1/1.12+1/1.12^2+..............+1/1.12^6]+7400/1.12^6

=(30100*4.111407324)+(7400*0.506631121)

=$127,502.43

Present value of outflows=95400+7400

=$102800

NPV=Present value of inflows-Present value of outflows

=$127,502.43-$102800

=$24702(Approx).

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