Capital Budgeting Dunay corporation is considering investing $510,000 in a proje
ID: 2501765 • Letter: C
Question
Capital Budgeting Dunay corporation is considering investing $510,000 in a project. The life of the project would be 6 years. The project would require additional working capital of $42,000 at the beginning. The annual net income from the project (after subtracting depreciation of $36,000 per year)would be $126,000. At the end of the third year, additional working capital of 30,000 will be needed in the project. At the end ofc the project, the plant assets used in the project will be disposed of for $80,000. Also,working capital of $24,000 will be released for use elsewhere at the end of the project. The company uses a discount rate of 12%. Required:Should the company undertake this project based on its net present value?Explanation / Answer
Calculation of Net present value of the investment:
Year
Cash Flow = CF
PVF(12%)
PV =CF*PVF
Initial Investment
0
$ (510,000.00)
1.00000
$ (510,000.00)
Additional Working capital
0
$ (42,000.00)
1.00000
$ (42,000.00)
Annual Cash inflows (126000+36000)
1 to 6
$ 162,000.00
4.11141
$ 666,047.99
Additional Working capital
3
$ (30,000.00)
0.71178
$ (21,353.41)
Diposal value of plant
6
$ 80,000.00
0.50663
$ 40,530.49
Release of working capital
6
$ 24,000.00
0.50663
$ 12,159.15
Net Present value
$ 145,384.22
The Net present value of the investment in positive, hence Company should undertake the project.
Calculation of Net present value of the investment:
Year
Cash Flow = CF
PVF(12%)
PV =CF*PVF
Initial Investment
0
$ (510,000.00)
1.00000
$ (510,000.00)
Additional Working capital
0
$ (42,000.00)
1.00000
$ (42,000.00)
Annual Cash inflows (126000+36000)
1 to 6
$ 162,000.00
4.11141
$ 666,047.99
Additional Working capital
3
$ (30,000.00)
0.71178
$ (21,353.41)
Diposal value of plant
6
$ 80,000.00
0.50663
$ 40,530.49
Release of working capital
6
$ 24,000.00
0.50663
$ 12,159.15
Net Present value
$ 145,384.22
The Net present value of the investment in positive, hence Company should undertake the project.
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