A firm is evaluating a project which will cost $7,586 today and provide addition

Question

A firm is evaluating a project which will cost $7,586 today and provide additional cash flows in years 1, 2, 3 and 4 of $5,568, $2,586, $2,586, and $7,560, respectively. The project will also employ $5,000 in working capital during the life of the project (allocated at the beginning and paid back in the last period). Its salvage value at the end of year 4 will be zero and the company uses a straight line depreciation schedule. The firm uses a discount rate of 8%? What is the NPV

Select one:

a. $5,986

b. $7,396

c. $12,396

d. $13,182

e. $8,721

Explanation / Answer

b. 7396 Statement showing calculation of NPV Particulars Time PVF@8% Amount PV(Amount *PVF) Cash Outflows(Invt in project)                                -                                        1.0000                             (7,586.000)                               (7,586.00) PV of Cash Outflows                               (7,586.00) Cash Inflows(Net of Tax)                         1.000                                      0.9259                               5,568.000                                  5,155.56 Cash Inflows(Net of Tax)                         2.000                                      0.8573                               2,586.000                                  2,217.08 Cash Inflows(Net of Tax)                         3.000                                      0.7938                               2,586.000                                  2,052.85 Cash Inflows(Net of Tax)                         4.000                                      0.7350                               7,560.000                                  5,556.83 PV of Cash Inflows                               14,982.31 NPV                                  7,396.31 Note: No tax savings on depreciation is considered since tax rate is not given Secondly this answer is without taking invt in WC which I think is not correct. We should alswys take Invt in WC as shown below Statement showing calculation of NPV Particulars Time PVF@8% Amount PV(Amount *PVF) Cash Outflows(Invt in project)                                -                                        1.0000                             (7,586.000)                               (7,586.00) Cash Outflows(Invt in WC)                                -                                        1.0000                             (5,000.000)                             (5,000.000) PV of Cash Outflows                             (12,586.00) Cash Inflows(Net of Tax)                         1.000                                      0.9259                               5,568.000                                  5,155.56 Cash Inflows(Net of Tax)                         2.000                                      0.8573                               2,586.000                                  2,217.08 Cash Inflows(Net of Tax)                         3.000                                      0.7938                               2,586.000                                  2,052.85 Cash Inflows(Net of Tax)                         4.000                                      0.7350                               7,560.000                                  5,556.83 Cash inflows(Invt in WC)                         4.000                                      0.7350                               5,000.000                                  3,675.15 PV of Cash Inflows                               18,657.46 NPV                                  6,071.46

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