Question

Bruno's Lunch Counter is expanding and expects operating cash flows of $20,800 a year for 5 years as a result. This expansion requires $57,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $5,000 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 14 percent?

$14,408

$12,005

$15,609

$17,653

$16,724

Answer 1

$12,005

Working:

Net Present Value is calculated as follows:
Year	0	1	2	3	4	5		Total
Operating cash flow		$       20,800	$       20,800	$       20,800	$       20,800	$       20,800
Investment in new fixed assets	$       -57,000
Investment in net working capital	$          -5,000
Release of net working capital						$          5,000
Total cash flow	$       -62,000	$       20,800	$       20,800	$       20,800	$       20,800	$       25,800
Discount factor @ 14%	1.0000	0.8772	0.7695	0.6750	0.5921	0.5194
Present Value	$       -62,000	$       18,246	$       16,005	$       14,039	$       12,315	$       13,400		$       12,005