A project is expected to create operating cash ﬂows of $35,000 a year for four years. The initial cost of the ﬁxed assets is $100,000. These assets will be worthless at the end of the project. An
Additional $5,000 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 11%?

Question

Quizplus · Accepted Answer

To calculate NPV we need to find the present value of all cash inflows and outflows.

Initial Cost: -$100,000

Annual Cash Inflows: 
Year 1: $35,000 
Year 2: $35,000 
Year 3: $35,000 
Year 4: $35,000

Net Working Capital: -$5,000 (outflow at the beginning of the project)

Using a financial calculator or Excel, the present value of these cash flows, discounted at the required rate of return of 11%, is:

NPV = -$100,000 + $35,000/(1+0.11)^1 + $35,000/(1+0.11)^2 + $35,000/(1+0.11)^3 + $35,000/(1+0.11)^4 - $5,000/(1+0.11)^0

NPV = $6,879.25

Therefore, the project has a positive NPV of $6,879.25, indicating that it is a good investment opportunity.

A Project Is Expected to Create Operating Cash ﬂOws of $35,000