A new,more efficient machine will last 4 years and allow inventory levels to decrease by $100,000 during its life.At a cost of capital of 13%,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 4 years is calculated as $100,000 / (1.13)^4 = $61,332. However, since the reduction in working capital is immediate, the full $100,000 is realized at the start, increasing NPV by $100,000.

A New,more Efficient Machine Will Last 4 Years and Allow