Question

Mattice Corporation is considering investing $720,000 in a project. The life of the project would be 11 years. The project would require additional working capital of $22,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $154,000. The salvage value of the assets used in the project would be $32,000. The company uses a discount rate of 18%. (Ignore income taxes) Click here to view Exhibit 12B-1 and Exhibit 128-2 to determine the appropriate discount factor(s) using the tables provided Required Compute the net present value of the project. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Answer 1

To calculate the net present value of the project, determine the present value of the cash inflows, working capital release, and salvage value, and subtract the initial investment.

Step-by-step explanation:

For the net present value of the project, we need to calculate the present value of the cash inflows and outflows. The annual net cash inflows of $154,000 occur for 11 years, so the present value of these inflows can be calculated using the discount factor from Exhibit 12B-1 and Exhibit 128-2. Using the tables provided, the discount factor for an 18% interest rate and 11 years is 0.18245. Multiplying the annual cash inflow by the discount factor gives us $28,016.7.

Next, we calculate the present value of the working capital release at the end of the project. The working capital release is $22,000 and occurs at the end of 11 years. Using the same discount factor, the present value of the working capital release is $3,999.9.

Finally, we calculate the present value of the salvage value of the assets. The salvage value is $32,000 and occurs at the end of 11 years. Again, using the same discount factor, the present value of the salvage value is $5,839.7.

To find the net present value of the project, we subtract the initial investment of $720,000 from the sum of the present values of the cash inflows, working capital release, and salvage value:

Net Present Value = Present Value of Cash Inflows + Present Value of Working Capital Release + Present Value of Salvage Value - Initial Investment

Net Present Value = $28,016.7 + $3,999.9 + $5,839.7 - $720,000

Net Present Value = -$682,144

Answer 2

The Project should be rejected.

The Net present value is lower than zero. Meaning the returns on the investment yields a loss, as we are not able to cover our initial investments.

Step-by-step explanation:

The Present value of the inflow and outflow should be considered before deciding the viability of the project.

Using the Net Present Value approach, we will want to consider against the outflows and at a certain cost of capital/rate of return if this projects meets at least the minimum threshold of breaking even. At this point the net cash flow would be at least zero for the project to be accepted.

Kindly review the document attached for detailed workings.