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2. Project A will cost $100,000 and requires working capital of $20,000. Annual revenue of $21,000...

2. Project A will cost $100,000 and requires working capital of $20,000. Annual revenue of $21,000 and expenses of $5,000 for five years. In the fifth year, there will be a salvage value of $8,000. Should the project be accepted with a discounted rate of 14%? Annuity rate 2.91371; Single-factor rate .51937.

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Computation of net present value
Year Nature of cash flow Cash flow Present value factor Present value
A B C D=1/(1+14%)^A E=D*C
0 Project cost       (100,000)                        1.0000          (100,000)
0 Working Capital         (20,000)                        1.0000            (20,000)
1 Net cash inflow          16,000                        0.8772             14,035
2 Net cash inflow          16,000                        0.7695             12,311
3 Net cash inflow          16,000                        0.6750             10,800
4 Net cash inflow          16,000                        0.5921               9,473
5 Net cash inflow          16,000                        0.5194               8,310
5 Working Capital          20,000                        0.5194             10,387
Net Present value          (54,683)
Note:- It is assumed that the working capital will be received at end of the 5th year
Conclusion: The project should not be accepted at 14% discount rate because it has negative present value of cash flow

ekkarill92 answered 1 year ago
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