Foley Systems is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require additional net operating working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV? (Hint: Cash flows from operations are constant in Years 1 to 3.)

Question

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The correct answer is A. The project's NPV is $23,852. The cash flows from operations are constant in Years 1 to 3, and the initial investment is $10,000. The depreciation expense is $3,333 per year, and the salvage value is zero. The additional net operating working capital is $2,000, which is recovered at the end of the project's life. The project's NPV is calculated as follows:NPV = -Initial investment + Sum of present values of cash flows from operations + Present value of salvage value + Present value of recovery of net operating working capitalNPV = -$10,000 + $10,000 * (1 - (1 + 0.1)^-3) / 0.1 + $0 + $2,000 * (1 - (1 + 0.1)^-3) / 0.1NPV = -$10,000 + $10,000 * 2.48685 + $0 + $2,000 * 2.48685NPV = -$10,000 + $24,868.50 + $0 + $4,973.70NPV = $23,852

Foley Systems Is Considering a New Investment Whose Data Are