A project has an initial requirement of $230,000 for fixed assets and $80,000 fo

Question

A project has an initial requirement of $230,000 for fixed assets and $80,000 for net working capital. The fixed assets will be depreciated to a zero book value over the 5-year life of the project and have an estimated salvage value of $200,000. All of the net working capital will be recouped at the end of the 5 years. The annual operating cash flow is $290,000 and the discount rate is 16 percent. What is the project's net present value if the tax rate is 35 percent?
A. $739,529.00
B. $818,260.34
C. $820,001.68
D. $821,386.23
E. $825,002.67

Explanation / Answer

Calculation of Net Present value of the project

Annual operating cash flow i.e 290000

Particulars Year Cash Flows PVF @ 16% Present Value Cash outflow to purchase fixed assets 0 230000 1 230000 Working capital requirements 0 80000 1 80000 Present value of cash outflows(A) 310000

Annual operating cash flow i.e 290000

1-5 290000 3.2743 949547 Working capital recouped 5 80000 0.4761 38088 Salvage Value(net of tax ) i.e 200000(0.65) 5 130000 0.4761 61893 Present value of cash inflows (B) 1049528 Net Present value (B)-(A) 739529

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