How does net working capital affect the NPV of a five-year project if working capital is expected to increase by $25,000 and the firm has a 15% cost of capital?
A)NPV will increase by $9,322
B)NPV will increase by $12,571
C)NPV will decrease by $25,000
D)NPV will decrease by $12,571

Question

Quizplus · Accepted Answer

An increase in working capital is an outflow of cash, which would decrease the NPV of the project. The decrease in NPV is calculated by discounting the increase in working capital at the project's cost of capital. The correct calculation involves finding the present value of the $25,000 increase in working capital at a 15% discount rate over the project's life (5 years), which results in a decrease in NPV by $12,571.

How Does Net Working Capital Affect the NPV of a Five-Year