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

jeff jeffy answered 2 years ago

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