A six-year project for Little Egypt,Inc.results in additional accounts receivable of $150,000,additional inventory of $50,000,and additional accounts payable of $80,000 today.What is the change in the NPV of a project solely due to the additional net working capital (NWC)needs? Assume a 14% discount rate,and the recovery of net working capital at the end of the project.

Question

Quizplus · Accepted Answer

To calculate the change in NPV due to additional NWC, we need to use the formula:

Change in NPV = (Change in NWC / (1+r)n)

where r is the discount rate (14%), n is the number of years in the project (6), and Change in NWC is calculated by subtracting the initial NWC from the final NWC.

Initial NWC = 0 (assumed)
Final NWC = Additional accounts receivable + Additional inventory - Additional accounts payable = 150,000 + 50,000 - 80,000 = 120,000

Change in NWC = 120,000 - 0 = 120,000

Plugging these values into the formula, we get:

Change in NPV = (120,000 / (1+0.14)6) = $42,670.05 (rounded to the nearest cent)

Therefore, the correct answer is B, a decrease of $42,670.

A Six-Year Project for Little Egypt,Inc