Question

Valotta Corporation has provided the following data concerning an investment project that it is considering:

The working capital would be released for use elsewhere at the end of the project.

Initial investment $690,000

Working capital $70,000

Annual cash flow $283,000 per year

Salvage value at the end of the project $21,000

Expected life of the project 4 years

Discount rate 11%

Required:

Calculate the net present value of the project and decide whether or not the company should make this investment. Please show all work using the format presented in class.

Answer 1

Investment	Year 0	Year 1	Year 2	Year 3	Year 4	NPV
Initial investment	($6,90,000)
Working Capital Required	($70,000)
Total Cash outflow	($7,60,000)
Annual Net Cash receipts		2,83,000	2,83,000	2,83,000	2,83,000
Working Capital Released					$70,000
Salvage value at the end of project					$21,000
Total Cash inflow	$0	$2,83,000	$2,83,000	$2,83,000	$3,74,000
Net Cash Flow	($7,60,000)	$2,83,000	$2,83,000	$2,83,000	$3,74,000
Life 4 years
Required Rate of Return is 11%
Present Value factor	1	0.901	0.812	0.731	0.659
Present Value of Cash outflow	-7,60,000
Present Value of Cash inflow		2,54,983	2,29,796	2,06,873	2,46,466
Net Present value	-7,60,000	2,54,983	2,29,796	2,06,873	2,46,466	1,78,118