Final Answer:
The net present value (NPV) of the working capital investment is $1.08 million.
Explanation:
The net present value (NPV) is calculated by determining the present value of future cash flows associated with the investment in net working capital. The initial investment of $2.00 million today needs to be recovered at the end of the project's life, which is in 10 years. Using the formula for NPV, the cash flows are discounted back to their present value using the given discount rate of 6.0%.
Each year, the recovery of the initial investment in net working capital decreases the cash outflow. To find the present value of these recoveries, the formula for the annuity due is applied, considering the recovery over the 10-year period. The NPV calculation involves discounting these cash flows back to the present value at the given discount rate.
Upon performing the calculations, the NPV is found to be $1.08 million. This positive NPV indicates that the investment in the working capital is profitable. The investment generates more returns over its life compared to the initial cost, making it financially viable for Aberdeen Outboard Motors to proceed with building the new plant. The NPV serves as a crucial metric for investment decisions, helping companies evaluate the profitability of potential projects.