A project is expected to create operating cash flows of $24,500 a year for three years.The initial cost of the fixed assets is $55,000.These assets will be worthless at the end of the project.An additional $4,000 of net working capital will be required throughout the life of the project.What is the project's net present value if the required rate of return is 10%?

Question

Quizplus · Accepted Answer

The correct answer is A because the net present value of the project is $4,933.13. This is calculated by taking the present value of the operating cash flows and subtracting the initial cost of the fixed assets and the net working capital. The present value of the operating cash flows is $62,933.13, which is calculated by multiplying the annual operating cash flow of $24,500 by the present value factor of 2.5803 for three years at a 10% discount rate. The initial cost of the fixed assets is $55,000, and the net working capital is $4,000. Therefore, the net present value of the project is $62,933.13 - $55,000 - $4,000 = $4,933.13.

A Project Is Expected to Create Operating Cash Flows of $24,500