Your client has asked you to evaluate an investment project for her using what y

Question

Your client has asked you to evaluate an investment project for her using what you have learned in school regarding the net present value method.  The project will run for eight years and your client

Your client has asked you to evaluate an investment project for her using what you have learned in school regarding the net present value method. The project will run for eight years and your client's required minimum return on investment is 22%. You have obtained the following information: Cost of machinery 220,000 Working capital required 80,000 Salvage value of the machine in eight years 12,000 Annual revenues & expenses: 180,000 Cost of goods sold 80,000 Selling and administrative expenses 20,000 NOTE: The working capital needed for the project will be released at the end of the eight years. Please provide a recommendation, explanation and supporting calculation for your client to review.

Explanation / Answer

Year 0 cashflow = -(cost of machinery+working capital required) = -(220,000+80,000) = -300,000

Operating cashflows in years 1-8 = 180,000-80,000-20,000 = 80,000

Total cashflow in year 8 = operating cashflow + salvage value + working capital released = 80,000+12,000 +80,000= 172,000

So cashflows in years 0-8 are -300000, 80000, 80000, 80000, 80000, 80000, 80000, 80000 and 172000 respectively.

NPV at 22% discount rate = -300,000 + 80,000/1.22^1 + 80,000/1.22^2 + 80,000/1.22^3 + 80,000/1.22^4 + 80,000/1.22^5 + 80,000/1.22^6 + 80,000/1.22^7 + 172,000/1.22^8 = $ 8,287.43

As the NPV is positive, the client should proceed with the investment project.

Hope this helped ! Let me know in case of any queries.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.