Windflower Farm is considering an investment in a new project, which would requi
ID: 2804726 • Letter: W
Question
Windflower Farm is considering an investment in a new project, which would require $5500 worth of capital expenditures and an increase of $4500 in net working capital that will be recovered at the end of the project. Each year, starting at the end of the first year, the operating cash flows of the project will be $1700 for 5 years. The project is risky, so its WACC is 13%. What is the net present value of the project?
$-1,396.71
$1,667.24
$-1,578.29
None of these
$-4,020.71
$-1,396.71
$1,667.24
$-1,578.29
None of these
$-4,020.71
Explanation / Answer
The correct answer is c) -$ 1578.29. Working is provided below.
Period
Cash Flow
Discounted Cash Flow (Cash Flow/(1+WACC)^n)
0
-10,000.00
-10,000.00
1
1700
1,504.42
2
1700
1,331.35
3
1700
1,178.19
4
1700
1,042.64
5
6200
3,365.11
Sum
-1,578.29
Year 0 Cash Flow:
-5500-4500
Year 5 Cash Flow
4500+1700
Period
Cash Flow
Discounted Cash Flow (Cash Flow/(1+WACC)^n)
0
-10,000.00
-10,000.00
1
1700
1,504.42
2
1700
1,331.35
3
1700
1,178.19
4
1700
1,042.64
5
6200
3,365.11
Sum
-1,578.29
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