Question

A project is expected to create operating cash flows of $22,500 a year for three years. The initial cost of the fixed assets is $50,000. These assets will be worthless at the end of the project. An additional $3,000 of net working capital will be required throughout the life of the project. What is the project’s net present value if the required rate of return is 10%?

Answer 1

Net Present Value = $58,188 - $53,000 = $5,188

Step-by-step explanation:

Net Present Value = Net Cash Inflow - Net Cash Outflow

Computing Net Cash Inflow Discounted @10% PV factor for each year =
`\frac{1}{(1 + r){^n}}` Where, r = interest rate = 10%, and n = period that is for year 1 = 1 for year 2 = 2 and for year 3 = 3

Year Cash Inflow PV Factor PV

1 $22,500 0.909 $20,452.5

2 $22,500 0.826 $18,585

3 $22,500 0.751 $16,897.5

3 $3,000 0.751 $2,253 (Working capital will be realized at end of project)

Net Cash inflow = $58,188

Net Cash outflow = Cost of fixed asset + Cost of working capital initially incurred

= $50,000 + $3,000 = $53,000

Net Present Value = $58,188 - $53,000 = $5,188