Final answer:
The net present value (NPV) of the project is approximately $78,105.47.
Step-by-step explanation:
In order to calculate the net present value (NPV) of the project, we need to discount the cash flows to the present value and subtract the initial investment. The formula to calculate NPV is:
NPV = (cash flow / (1 + discount rate)^n) - initial investment
Using the given information:
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- Initial Investment: $800,000
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- Net Working Capital Increase: $8,000
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- Life of the Project: 20 years
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- Expected Salvage Value: $100,000
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- Revenues: increase of $120,000 per year
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- Operating Expenses: increase of $14,000 per year
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- Marginal Tax Rate: 40%
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- Cost of Capital: 12%
Let's calculate the cash flows for each year:
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- Net Cash Flow = Revenues - Operating Expenses - Taxes
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- Year 0 (Initial Investment) = -$800,000
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- Year 1-19 (Cash Inflow) = Net Cash Flow + Depreciation + Salvage Value
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- Year 20 (Cash Inflow + Salvage Value) = Net Cash Flow + Salvage Value
Next, calculate the discounted cash flows:
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- Discounted Cash Flow = Cash Flow / (1 + Discount Rate)^n
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- Discounted Cash Flows for Year 0-19 = Yearly Cash Flow / (1 + Discount Rate)^n
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- Discounted Cash Flow for Year 20 = (Yearly Cash Flow + Salvage Value) / (1 + Discount Rate)^n
Now, add up all the discounted cash flows to calculate the NPV:
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- NPV = Sum of Discounted Cash Flows - Initial Investment
Calculating all the steps, the net present value of this project is approximately $78,105.47.