Question

Bruno's Lunch Counter is expanding and expects operating cash flows of $31,700 a year for 6 years as a result. This expansion requires $110,300 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $7,800 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 11 percent

Answer 1

The net present value of the expansion project is $24,083.79.

Step-by-step explanation:

To calculate the net present value (NPV) of the expansion project, we need to discount the projected cash flows to their present value. The formula to calculate NPV is:

NPV = -Initial Investment + PV(Cash Flow1) + PV(Cash Flow2) + ... + PV(Cash Flown)

Where PV is the present value of each cash flow, calculated using the formula:

PV = Cash Flow / (1 + r)n

Given the projected cash flows of $31,700 per year for 6 years, an initial investment of $110,300, and a required rate of return of 11 percent, we can calculate the NPV as follows:

1. Calculate the present value of each cash flow: PV(Cash Flow1) = $31,700 / (1 + 0.11)1 = $28,513.51
2. Calculate the present value of each cash flow: PV(Cash Flow2) = $31,700 / (1 + 0.11)2 = $25,673.19
3. Calculate the present value of each cash flow: PV(Cash Flow3) = $31,700 / (1 + 0.11)3 = $23,160.98
4. Calculate the present value of each cash flow: PV(Cash Flow4) = $31,700 / (1 + 0.11)4 = $20,928.83
5. Calculate the present value of each cash flow: PV(Cash Flow5) = $31,700 / (1 + 0.11)5 = $18,940.86
6. Calculate the present value of each cash flow: PV(Cash Flow6) = $31,700 / (1 + 0.11)6 = $17,166.42
7. Calculate the NPV: NPV = -$110,300 + $28,513.51 + $25,673.19 + $23,160.98 + $20,928.83 + $18,940.86 + $17,166.42 = $24,083.79

Therefore, the net present value of the expansion project at a required rate of return of 11 percent is $24,083.79.