A new, more efficient machine will last four years and allow inventory levels to decrease by $100,000 during its life.At a cost of capital of 13 percent, how does the net working capital change affect the project's NPV?
A)NPV increases by $38,668
B)NPV increases by $61,330
C)NPV increases by $100,000
D)NPV increases by $138,668

Question

Quizplus · Accepted Answer

The decrease in inventory levels by $100,000 is a reduction in net working capital, which is a cash inflow. The present value of this cash inflow at a 13% cost of capital over four years is calculated as $100,000 / (1.13)^4 = $61,332. However, since the reduction in working capital is immediate, the NPV increases by the full $100,000.

A New, More Efficient Machine Will Last Four Years and Allow