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Bruno's Lunch Counter is expanding and expects operating cash flows of $28,500 a year for 4...

Bruno's Lunch Counter is expanding and expects operating cash flows of $28,500 a year for 4 years as a result. This expansion requires $67,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $4,400 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 11 percent?

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Answer #1

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

=28500/1.11+28500/1.11^2+28500/1.11^3+28500/1.11^4+4400/1.11^4[Note:The net working capital will be released at the end of project]

=28500[1/1.11+1/1.11^2+1/1.11^3+1/1.11^4]+4400/1.11^4

=(28500*3.10244569)+(4400*0.658730974)

=$91318.12

Present value of outflows=67000+4400=71400

NPV=Present value of inflows-Present value of outflows

=$91318.12-71400

=$19918.12(Approx).

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