A project will produce operating cash flows of $42,000 a year for four years.During the life of the project,inventory will be lowered by $12,000,accounts receivable will increase by $15,000,and accounts payable will increase by $10,000.The project requires $120,000 of new equipment that will be depreciated straight-line to a zero book value over four years.At the end of the project,net working capital will return to its normal level and the equipment will be sold for $25,000,after taxes.What is the net present value given a required return of 14 percent?

Question

Quizplus · Accepted Answer

NWC requirement = $12,000 - 15,000 + 10,000 = $7,000CF₀ = $7,000 - 120,000 = -$113,000C0_4, excluding OCF = -$7,000 + 25,000 = $18,000NPV = -$113,000 + $42,000[(1 - 1/1.14⁴)/.14] + $18,000/1.14⁴ = $20,033.36

A Project Will Produce Operating Cash Flows of $42,000 a Year