The Whilst Co. is analyzing a project that has projected sales of $189,400 and costs of $102,301. The project requires an investment in inventory of $15,000 plus another $28,000 in accounts
Receivable. Fixed assets of $80,000 are needed and belong in a 30% CCA class. Accounts payable
Will increase by $36,001. An interest expense of $11,000 will be incurred annually. The project has a
Life of 3 years. At the end of the three years, the equipment has an estimated market value of
$26,001. The company requires a 14% rate of return and is in the 34% marginal tax bracket. What is
The net present value of this project?

Question

Quizplus · Accepted Answer

Step 1: Calculate the annual cash flows.
Year 0: -$123,301 (Initial investment of $123,301 = $15,000 + $28,000 + $80,000 - $36,001)
Year 1: $84,099 (Sales of $189,400 - Costs of $102,301)
Year 2: $84,099 (Sales of $189,400 - Costs of $102,301)
Year 3: $110,099 ($84,099 + Equipment market value of $26,001)
Step 2: Calculate the present value factor for a 14% rate of return and 3-year life.
Year 1: 1 / (1 + 14%)^1 = 0.8772
Year 2: 1 / (1 + 14%)^2 = 0.7695
Year 3: 1 / (1 + 14%)^3 = 0.6750
Step 3: Calculate the present value of each cash flow.
Year 0: -$123,301 x 1 = -$123,301
Year 1: $84,099 x 0.8772 = $73,738
Year 2: $84,099 x 0.7695 = $64,754
Year 3: $110,099 x 0.6750 = $74,238
Step 4: Calculate the net present value.
NPV = Sum of present values - Initial investment
NPV = $73,738 + $64,754 + $74,238 - $123,301 = $91,429
Since the NPV is positive and greater than 0, the project would be accepted. The closest answer choice is D) $91,425.