Question

An office building is expected to create operating cash flows of $26,500 a year for three years, based on tenants' rental income. The purchase of the fixed assets for this building will cost $55,000. These assets will have no value at the end of the project. An additional $5,000 of net working capital will be required throughout the life of the project. Calculate the net present value of this project if the required rate of return is 15 percent?

Multiple Choice

• $8,793.05

• $3,793.05

• $1,566.67

• $505.47

• $-1,206.95

Answer 1

Initial Investment of the project = Purchase Cost of Fixed Assets + Increase in Net Working Capital

= $55,000 + $5,000

= $60,000

.

Cash Flow for year – 1 = $26,500

Cash Flow for year – 2 = $26,500

Cash Flow for year – 3 = $26,500 + Recovery of Working Capital at the end of project

= $26,500 + $5,000

= $31,500

.

Calculation of NPV of the Project:

Year	Cash Flows (1)	DF Working	Discounting Factor @ 15% (2)	Present Value (3) = (1)*(2)
0	(60,000)	1	1	(60,000.00)
1	26,500	1/1.15^1	0.869565217	23,043.48
2	26,500	1/1.15^2	0.756143667	20,037.81
3	31,500	1/1.15^3	0.657516232	20,711.76
			NPV of the Project:	3,793.05

.

Therefore , out of the given options , Option-2 : $3,793.05 is correct :