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. $(92,952) b. $(157,416) c. $(13,952) d. $(25,000)

Explanation / Answer

Items and computations Year Amount of Cash inflow 11% factor Present value of cash flow Initial Investment Now       640,000 1      (640,000) Working capital required Now          79,000 1         (79,000) net annual cash inflows 1-3 205000 2.624         537,920 Working capital released 3          79,000 0.816           64,464 Equipment Sold 3          29,000 0.816           23,664 Net Present Value         (92,952)

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