Question

A new venture will require an initial investment in fixed assets of $20,000 and in working capital of $10,000. The fixed assets will have no salvage value at the end of the project's four-year life, and the working capital will be completely recovered at the end of the project. The organization's cost of capital is 16%. At a time value of money of 16%, the present value of an ordinary annuity of $1/year for four years is 2.8 and the present value of $1 at the end of four years is 0.6. What is the annual net cash inflow required for the project to break even on a time-adjusted basis

Answer 1

$5,000

Step-by-step explanation:

we need to determine the annual cash flows in order that NPV = $0

initial outlay = present value of future cash flows

$20,000 = (FCF x 2.8) + ($10,000 x 0.6)

$20,000 = 2.8FCF + $6,000

$14,000 = 2.8FCF

FCF = $14,000 / 2.8 = $5,000