Dunay Corporation is considering investing $900,000 in a project. The life of th

Question

Dunay Corporation is considering investing $900,000 in a project. The life of the project would be 7 years. The project would require additional working capital of $40,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $190,000. The salvage value of the assets used in the project would be $50,000. The company uses a discount rate of 12%. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using tables. Required: Compute the net present value of the project. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Explanation / Answer

Initial Investment = $900,000
Initial NWC required = $40,000
Life of project = 7 years
Annual Net cash inflows = $190,000
Salvage Value = $50,000
Discount rate = 12%

NPV = -Initial Investment - Initial NWC required + PV of Annual Net Cash inflows + PV of Salvage Value + PV of NWC recovered
NPV = -$900,000 - $40,000 + $190,000 * PVA of $1 (12%, 7) + $50,000 * PV of $1 (12%, 7) + $40,000 * PV of $1 (12%, 7)
NPV = -$900,000 - $40,000 + $190,000 * 4.564 + $50,000 * 0.452 + $40,000 * 0.452
NPV = -$32,160

So, Net Present Value of the project is -$32,160.

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