Question

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.

Answer 1

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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