Question

A project will produce an operating cash flow of $295,000 a year for four years. The initial cash outlay for equipment will be $721,000. The net aftertax salvage value of $72,000 will be received at the end of the project. The project requires $79,000 of net working capital that will be fully recovered when the project ends. What is the net present value of the project if the required rate of return is 15 percent?

		$114,372
		$121,017
		$128,553
		$136,764
		$144,915

Answer 1

$128,553

Working:

Calculation of net present value of the project:
Year				a	0	1	2	3	4		Total
operating Cash flow				b		$       2,95,000	$       2,95,000	$       2,95,000	$       2,95,000
Initial cost of Equipment				c	$       -7,21,000
Net after tax salvage value				d					$           72,000
Investment of working capital				e	$           -79,000
Release of working capital				f					$           79,000
Total Cash flows				f=a+b+c+d+e+f	$       -8,00,000	$       2,95,000	$       2,95,000	$       2,95,000	$       4,46,000
Discount factor				g=1.15^-a	1.0000	0.8696	0.7561	0.6575	0.5718
Present Value				h=f*g	$       -8,00,000	$       2,56,522	$       2,23,062	$       1,93,967	$       2,55,002		$ 1,28,553