A potential project with is expected to generate the following revenue per annum

Question

A potential project with is expected to generate the following revenue per annum for the next 6 years with a after-tax operating cash flow margin of 20% (prior to consideration of working capital) from new business with a government agency.

Year 1 $600,000; Year 2 $650,000; Year 3 $675,000; Year 4 $700,000; Year 5 $700,000; Year 6 $650,000

The project will have an initial outlay of $450,000. The firm uses a cost of capital of 11%. What is the NPV of the project?

Now consider, the government agency is expected to be a slow pay with an A/R of 175 days. What is the revised NPV of the project?

Explanation / Answer

Revised Year Investment/OCF 80% 20% 175 A/R delay 0 $       -450,000.00 $ -450,000.00 $ -450,000.00 1 $         600,000.00 $   480,000.00 $   480,000.00 2 $         650,000.00 $   520,000.00 $ 120,000.00 $   640,000.00 3 $         675,000.00 $   540,000.00 $ 130,000.00 $   670,000.00 4 $         700,000.00 $   560,000.00 $ 135,000.00 $   695,000.00 5 $         700,000.00 $   560,000.00 $ 140,000.00 $   700,000.00 6 $         650,000.00 $   520,000.00 $ 140,000.00 $   660,000.00 7 $ 130,000.00 $   130,000.00 NPV(11%,B3:B8) $ 2,785,693.46 $ 2,730,481.52 $ -450,000.00 $ -450,000.00 NPV $ 2,335,693.46 $ 2,280,481.52

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