Zabarkes Corporation is considering a capital budgeting project that would requi

Question

Zabarkes Corporation is considering a capital budgeting project that would require an initial investment of $640,000 and working capital of $79,000. The working capital would be released for use elsewhere at the end of the project in 3 years. The investment would generate annual cash inflows of $205,000 for the life of the project. At the end of the project, equipment that had been used in the project could be sold for $29,000. The company’s discount rate is 7%. The net present value of the project is closest to: a. $(13,952) b. $(157,416) c. $(92,952) d. $(25,000)

Explanation / Answer

c. $(92,952)

Year 0 initial investment (640,000) working capital     (79,000) Total outflow (719,000) Year 1 to 3 Cash inflow     205,000 PF annuity factor        2.6243 PV of cash flow     537,982 YEar                  3 Sale of Equipment        29,000 working captial recovery        79,000 Total terminal flow     108,000 PF discount factor 0.8163 PV of cash flow        88,160 NPV     (92,858) (inflow - outflow)

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