1.a) A project is expected to create operating cash flows of $35,261 a year for

Question

1.a) A project is expected to create operating cash flows of $35,261 a year for three years. The initial cost of the fixed assets is $41,879. These assets will be worthless at the end of the project. An additional $8,824 of net working capital will be required throughout the life of the project, and will be recouped at the end. What is the project's net present value if the required rate of return is 11.6 percent?

1.b) SQLite Sports is considering adding a miniature golf course to its facility. The course would cost $137,380, would be depreciated on a straight line basis over its 5-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,267 a year with $22,339 of that amount being variable cost. The fixed cost would be $13,380. In addition, the firm anticipates an additional $10,559 in revenue from its existing facilities if the golf course is added. The project will require $4,070 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 8.8 percent and a tax rate of 39 percent?

Explanation / Answer

15%

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