Question

Mattice Corporation is considering investing $900,000 in a project. The life of the project would be 7 years. The project would require additional working capital of $40,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $190,000. The salvage value of the assets used in the project would be $50,000. The company uses a discount rate of 12%. (Ignore income taxes.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using the tables provided.

Required:

Compute the net present value of the project. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar amount.)

Answer 1

Computation of the net present value is:

Net present value = Present value of initial investment + Present value of additional working capital + Present value of annual net cash flows + Present value of additional working capital release + Present value of salvage value

= -$900,000 - $40,000 + $867,103 + $18,092 + $22,615

= -$32,190

Hence, the net present value is -$32,190.

Working Notes:

1.

Computation of the present value of initial investment is:

Present value of initial investment = Initial investment * Present value factor at 12% of year 0

= -$900,000 * 1

= -$900,000

Hence, the present value of initial investment is -$900,000.

2.

Computation of the present value of additional working capital is:

Present value of additional working capital = Additional working capital * Present value factor at 12% of year 0

= -$40,000 * 1

= -$40,000

Hence, the present value of additional working capital is -$40,000.

3.

Computation of the present value factor at 12% of year 1 to year 7 is:

Present value factor at 12% of year 1 to year 7 = Present value factor at 12% of year 1 + Present value factor at 12% of year 2 + Present value factor at 12% of year 3 + Present value factor at 12% of year 4 + Present value factor at 12% of year 5 + Present value factor at 12% of year 6 + Present value factor at 12% of year 7

= 0.8929 + 0.7972 + 0.7118 + 0.6355 + 0.5674 + 0.5066 + 0.4523

= 4.5637

Hence, the present value factor at 12% of year 1 to year 7 is 4.5637.

4.

Computation of the present value of annual net cash flows is:

Present value of annual net cash flows = Annual net cash flows * Present value factor at 12% of year 1 to year 7

= $190,000 * 4.5637

= $867,103

Hence, the present value of annual net cash flows is $867,103.

5.

Computation of the present value of additional working capital realsed is:

Present value of additional working capital release = Additional working capital * Present value factor at 12% of year 7

= $40,000 * 0.4523

= $18,092

Hence, the present value of additional working capital release is $18,092.

6.

Computation of the present value of salvage value is:

Present value of salvage value = Salvage value * Present value factor at 12% of year 7

= $50,000 * 0.4523

= $22,615

Hence, the present value of present value of salvage value is $22,615.