Question

A project will produce an operating cash flow of $136,000 a year for three years. The initial cash outlay for equipment will be $274,000. The net aftertax salvage value of $15,000 will be received at the end of the project. The project requires $61,000 of net working capital up front that will be fully recovered. What is the net present value of the project if the required rate of return is 10 percent? corporate finance

Answer 1

NPV =$ 60,311.80

Step-by-step explanation:

The net present value (NPV) of a project is the present value of cash inflow less the present value of cash outflow of the project.

NPV = PV of cash inflow - PV of cash outflow

We can set out the cash flows of the project using the table below:

0 1 2 3

Operating cash flow 136,000 136,000 136,000

Initial cost (274,000)

Working capital (61,000 ) 61,000

Salvage value 15000

Net cashflow (335,000) 136,000 136,000 212,000.

PV inflow= (136000)× (1.1)^(-1) + (136,000× (1.1)^(-2) + (112,000)× (1.1)^(-3)

= 395,311.80

NPV =395,311.80 -335,000

=$ 60,311.80