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

To calculate the net present value (NPV) of the project, we first need to consider all cash inflows and outflows. The initial investment includes the cost of fixed assets ($80,000) and the net working capital required ($6,000), totaling $86,000 as an outflow. The inflows are the operating cash flows of $68,300 a year for 3 years. Using the formula for NPV and a discount rate of 14%, we calculate the present value of the inflows and subtract the initial outflow to find the NPV. The correct NPV, given the options, is $76,617.30, which accounts for the time value of money and provides the value of the project in today's dollars.

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