In: Finance
Your consulting firm has been hired to evaluate a manufacturing process. In order to value the process, you’ve decided to value each piece separately. You are currently evaluating the effect of inventory on the final value of the project. The process requires an initial amount of NWC of $500k. Each year, NWC will increase by $100k. The manufacturing process will be in operation for 10 years before shutting down. If the firm’s discount rate is 6%, what is the effect of the project’s NWC on the total NPV of the project (in other words, what is the NPV of the NWC)?
NWC | |||||||||||
Discount rate | 0.06 | ||||||||||
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
Cash flow stream | -500000 | -100000 | -100000 | -100000 | -100000 | -100000 | -100000 | -100000 | -100000 | -100000 | 1400000 |
Discounting factor | 1 | 1.06 | 1.1236 | 1.191016 | 1.262477 | 1.338226 | 1.418519 | 1.50363 | 1.593848 | 1.689479 | 1.790848 |
Discounted cash flows project | -500000 | -94339.6 | -88999.6 | -83961.9 | -79209.37 | -74725.8 | -70496.1 | -66505.7 | -62741.2 | -59189.8 | 781752.7 |
NPV = Sum of discounted cash flows | |||||||||||
NPV NWC = | -398416.54 | ||||||||||
Where | |||||||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||||||||
Discounted Cashflow= | Cash flow stream/discounting factor | ||||||||||
NPV of project decreases by 398416.54