A project will produce operating cash ﬂows of $60,000 a year for four years. During the life of the project, inventory will be lowered by $20,000 and accounts receivable will increase by $25,000.
Accounts payable will decrease by $10,000. The project requires the purchase of equipment at an
Initial cost of $200,000. The equipment will be depreciated straight-line to a zero book value over
The life of the project. The equipment will be salvaged at the end of the project creating a $30,000
After-tax cash ﬂow. At the end of the project, net working capital will return to its normal level. What
Is the net present value of this project given a required return of 12%?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by considering the initial investment, operating cash flows, changes in net working capital, and the salvage value. The initial investment is $200,000. The net change in working capital is -$15,000 ($20,000 decrease in inventory - $25,000 increase in accounts receivable - $10,000 decrease in accounts payable). The annual depreciation is $50,000 ($200,000/4 years). The operating cash flow each year is $60,000. The NPV is calculated by discounting these cash flows at 12% and adding the salvage value of $30,000 at the end of the project. The NPV is approximately -$4,160.73.

A Project Will Produce Operating Cash ﬂOws of $60,000 a Year