Question

Bruno's Lunch Counter is expanding and expects operating cash flows of $24,600 a year for 6 years as a result. This expansion requires $76,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $6,000 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 10 percent

Answer 1

The net present value of this expansion project at a required rate of return of 10 percent is $11,284.40.

Step-by-step explanation:

The Summary of Cash flows are as follows :

Year 0

Cash Flows ($76,000 + $6,000) = - $82,000

Year 1

Cash Flow = $24,600

Year 2

Cash Flow = $24,600

Year 3

Cash Flow = $24,600

Year 4

Cash Flow = $24,600

Year 5

Cash Flow = $24,600

Year 6

Cash Flow ($24,600 + $6,000) = $30,600

Note that the net working capital is recouped at the end of the project.

Calculation of net present value of this expansion project

Note : I am using a financial calculator here

- $82,000 CFj

$24,600 CFj

$24,600 CFj

$24,600 CFj

$24,600 CFj

$24,600 CFj

$30,600 CFj

10 % i/yr

Shift NPV = $11,284.40