Lakeside Winery is considering expanding its winemaking operations.The expansion will require new equipment costing $708,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project.The quipment can be sold for $220,000 after the four years.The project requires $46,000 initially for net working capital,all of which will be recouped at the end of the project.The projected operating cash flow is $211,500 a year.What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 34 percent?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by finding the present value of cash inflows and outflows. The initial outflow is $754,000 ($708,000 for equipment + $46,000 for working capital). The annual cash inflow is $211,500, and the salvage value of $220,000 is received at the end. The NPV is calculated using the formula: NPV = Σ (Cash inflow / (1 + r)^t) - Initial investment. After calculating, the NPV is approximately -$7,632.77.

Lakeside Winery Is Considering Expanding Its Winemaking Operations