A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be
60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 12%. Calculate the NPV of the project:
A) 14,418
B) 8443
C) -2735
D) None of the above

Question

Quizplus · Accepted Answer

The NPV is calculated by finding the present value of cash flows, including initial investment, operating cash flows, and terminal cash flow. The operating cash flow is calculated by subtracting costs and taxes from revenues and adding back depreciation. The terminal cash flow includes the salvage value and recovery of working capital. The NPV is the sum of discounted cash flows minus the initial investment.

A Project Requires an Initial Investment in Equipment of $90,000