Calculate the net present value of a project with a net investment of $20,000 fo
ID: 2648385 • Letter: C
Question
Calculate the net present value of a project with a net investment of $20,000 for equipment and an additional net working capital investment of $5,000 at time 0. the project is expected to generate net cash flows of $7,000 per year over a 10 year estimated economic life. In addition the net working capital will be recovered at the end of the project. the required return on the project is 11 percent and the company has a marginal tax rate of 40 percent. What is the meaning of the computed net present value figure?
Explanation / Answer
Statement showing calculation of Present Value Particulars Time PVF@10% Amount PV Cash Outflows -Initial Inv - 1.00 (20,000.00) (20,000.00) WC - 1.00 (5,000.00) (5,000.00) PV of cash outflows (25,000.00) Cash Inflows 1.00 0.9009 7,000.00 6,306.31 Cash Inflows 2.00 0.8116 7,000.00 5,681.36 Cash Inflows 3.00 0.7312 7,000.00 5,118.34 Cash Inflows 4.00 0.6587 7,000.00 4,611.12 Cash Inflows 5.00 0.5935 7,000.00 4,154.16 Cash Inflows 6.00 0.5346 7,000.00 3,742.49 Cash Inflows 7.00 0.4817 7,000.00 3,371.61 Cash Inflows 8.00 0.4339 7,000.00 3,037.49 Cash Inflows 9.00 0.3909 7,000.00 2,736.47 Cash Inflows 10.00 0.3522 7,000.00 2,465.29 WC 10.00 0.3522 5,000.00 1,760.92 PV of Cash Inflows 42,985.55 NPV 17,985.55 Time PVF @5% Calculations 1.00 0.9009 1/1.11 2.00 0.8116 .9009/1.11 3.00 0.7312 .8116/1.11 4.00 0.6587 .7312/1.11 5.00 0.5935 .6587/1.11 6.00 0.5346 .5935/1.11 7.00 0.4817 .5346/1.11 8.00 0.4339 .4817/1.11 9.00 0.3909 .4339/1.11 10.00 0.3522 .3909/1.11 Since NPV is positive project should be accepted as it is benefiacial to company Note: we have assumed Net cash flows given in the question are after taking into consideration depreciation and tax effects.
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