Question

What is the net present value of the project if inventories must be increased at the start of the project (year 0) by $250,000 and will be recovered at the end (year 11), given that the NPV of the project ignoring changes in net working capital is $-84,927.11?

(a) $-84,927.11
(b) $165,072.89
(c) $250,000.00
(d) $335,072.89

Answer 1

The net present value (NPV) of the project, considering the change in net working capital, is $165,072.89.

Step-by-step explanation:

The net present value (NPV) of the project can be calculated by considering the change in net working capital. In this case, the inventories are increased by $250,000 at the start of the project (year 0) and will be recovered at the end (year 11). The NPV of the project ignoring changes in net working capital is given as $-84,927.11. To calculate the NPV considering the change in net working capital, we need to add the change in net working capital to the NPV ignoring changes.

So, NPV with changes in net working capital = NPV ignoring changes + change in net working capital

= $-84,927.11 + $250,000

= $165,072.89

Therefore, the net present value of the project, considering the change in net working capital, is $165,072.89.