Question

A project will produce an operating cash flow of $91,500 a year for three years. The initial cash outlay for

equipment will be $188,000. The net aftertax salvage value of $17,000 will be received at the end of the

project. The project requires $52,000 of net working capital up front that will be fully recovered. What is the

net present value of the project if the required rate of return is 14 percent?

A. $22,318.76 B. $19,002.37 C. $15,450.93 D. $24,670.39 E. $17,488.70

Answer 1

NPV Calculation:

Year	Investment in Equipment	Cashflow from operations	Working capital	Net Cashflows	Discounting factor @ 14% p.a.	Present Value
0	-1,88,000		-52,000	-2,40,000	1.0000	-2,40,000.00
1		91,500		91,500	0.8772	80,263.16
2		91,500		91,500	0.7695	70,406.28
3	17,000	91,500	52,000	1,60,500	0.6750	1,08,332.93
			Net present Value (NPV)			19,002.37

Option B is correct. B 19,002.37

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