How does net working capital affect the NPV of a 5-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 net working capital means an outflow of cash, which reduces the project's cash flow. As a result, the NPV will decrease. The dollar value of the decrease will be the present value of the increase in working capital, which is $25,000 multiplied by the discount rate: $25,000/(1+0.15)^1 +$25,000/(1+0.15)^2 +$25,000/(1+0.15)^3 +$25,000/(1+0.15)^4 +$25,000/(1+0.15)^5 = $12,571. Therefore, Option D is correct.

How Does Net Working Capital Affect the NPV of a 5-Year