A project is expected to create operating cash ﬂows of $68,300 a year for 3 years. The initial cost of the ﬁxed assets is $80,000. These assets will be worthless at the end of the project. An
Additional $6,000 of net working capital will be required throughout the life of the project. What is
The project's net present value if the required rate of return is 14%?

Question

Quizplus · Accepted Answer

1. Calculate the annual cash flows:

Year 1: $68,300
Year 2: $68,300
Year 3: $68,300

2. Calculate the PV of the cash flows using the formula:

PV = CF / (1 + r)n

Year 1: PV = $68,300 / (1 + 0.14)1 = $59,824.56
Year 2: PV = $68,300 / (1 + 0.14)2 = $52,313.21
Year 3: PV = $68,300 / (1 + 0.14)3 = $45,529.53

3. Calculate the PV of the initial cost and net working capital:

PV of initial cost = -$80,000 (negative because it is a cost)
PV of net working capital = -$6,000 (negative because it is a cost)

4. Calculate the NPV by summing the PVs:

NPV = PV of cash flows + PV of initial cost + PV of net working capital
NPV = $59,824.56 + $52,313.21 + $45,529.53 - $80,000 - $6,000
NPV = $72,667.30

Therefore, the project's net present value is $76,617.30 (Choice C).

A Project Is Expected to Create Operating Cash ﬂOws of $68,300