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%? (remember that the additional net working capital is entered as part of the initial investment and added to the last final cash flow in the third period)

A. $2,208.11
B. $2,954.17
C. $4,306.09
D. $5,208.11
E. $5,954.17

Answer 1

D. $5,208.11

Step-by-step explanation:

Projected cash flow for each year for 3 years = $22,500

Initial cost = $50,000

Additional working capital required = $3,000

Year Cash flow PVIF @ 10% Discounted Value Total

0 - $50,000 $1 - $50,000 -$50,000

0 - $3,000 $1 - $3,000 -$3,000

1 $22,500 0.909 $20,452.5 $20,452.5

2 $22,500 0.826 $18,525 $18,525

3 $22,500 0.751 $16,897.5 $16,897.5

3 $3,000 0.751 $2,253 $2,253

Total $5,128.00

The nearest value is $5,208 and the difference is due to rounding off.

Correct option is

D. $5,208.11