Alopecia Hair Tonic Corporation is considering an investment project that is expected to generate net cash inflows of $65,000 per year for 4 years. The only initial investment funds required will be a $150,000 increase in working capital. This will be released at the end of the 4 years. Alopecia's after-tax cost of capital is 12% and its tax rate is 30%. The net present value of this investment project is closest to:

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount the cash flows to their present value using the after-tax cost of capital. The initial investment of $150,000 does not need to be discounted because it occurs at time zero. Using the formula for NPV:

NPV = (CF1 / (1 + r)^1) + (CF2 / (1 + r)^2) + (CF3 / (1 + r)^3) + (CF4 / (1 + r)^4) - Initial Investment

where CF1 through CF4 are the annual cash flows, r is the after-tax cost of capital, and Initial Investment is the amount of the working capital required.

Substituting the values, we get:

NPV = (65,000 / (1 + 0.12)^1) + (65,000 / (1 + 0.12)^2) + (65,000 / (1 + 0.12)^3) + (65,000 / (1 + 0.12)^4) - 150,000
NPV = 49,991 + 40,918 + 33,382 + 27,269 - 150,000
NPV = $1,560

Since the NPV is positive, the project should be accepted. Of the answer choices given, option C is the closest to the calculated NPV.

Alopecia Hair Tonic Corporation Is Considering an Investment Project That