Question
In: Finance
A project requires an initial cost of $225,000; has a present value of operating cash flows...
A project requires an initial cost of $225,000; has a present value of operating cash flows over its ten-year life of $310,000; and has a book value at the end of 10 years of $120,000. Current assets of $20,000, and current liabilities of $4,000 will be needed for the project to begin. Calculate the terminal value and NPV using its book value after 10 years, assuming a 15 percent discount rate.
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Expert Solution
| Initial cost | $ 225,000 |
| PV of operating casflow | $ 310,000 |
| Book value at the end of 10 years | $ 120,000 |
| Current assets | $ 20,000 |
| Current liabilities | $ (4,000) |
| Net working capital | $ 16,000 |
| Terminal value | 120000+16000 |
| Terminal value | $ 136,000 |
| PV of terminal value | 136000/(1+15%)^10 |
| PV of terminal value | $ 33,617.12 |
| NPV= | PV of operating cash + PV of terminal value - initial investment |
| NPV= | 310000+33617.12-225000 |
| NPV= | $ 118,617.12 |
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