Question

The Lunch Counter is expanding and expects operating cash flows of $32,500 a year for seven years as a result. This expansion requires $28,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $2,800 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 14 percent

Answer 1

$109,688.89

Step-by-step explanation:

According to the scenario, computation of given data are as follows,

Formula for Net present value are as follows,

NPV = -Investment in fixed asset - Net working Capital + Operating cashflow × ( 1 -
`(1+r)^(-n)`) ÷ r + Net working capital ×
`(1+r)^(-n)`

Where, r = rate of return

n = number of years

By putting the value, we get

NPV = -28,000 - 2,800 + 32,500 × ( 1 -
`(1+0.14)^(-7)`) ÷ 0.14 + 2,800 ×
`(1+0.14)^(-7)`

By solving the above equation, we get

NPV = $109,688.89