initial capital cost = 3,500,000 operating cash flow for each year = $1,000,000 recovery of capital...

initial capital cost = 3,500,000
operating cash flow for each year = $1,000,000
recovery of capital Assets after five years =$270,000

the hurdle rate for this project is 12%. it the initial cost of working capital is $490,000 for each items as teapots, teacups, saucers, and napkins, should farbucks open this new shop if it will be in business for only five years?

what is the most it can invest in working capital and still have a positive net present value?

Solutions

Expert Solution

Following screenshot shows how to calculate the NPV:

Explanation:

As no tax rate is give, the operating CF is same as after tax CF because we dont need to consider depreciation to first find out the NI and then add it back to find the CF
CF in year 0 = Fixed investment+Working capital investment
CF in year 5 = Annual operating CF+salvage value+Working capital investment = 1000000+270000+490000
As NPV is positive, the company should invest in this project if the discount rate is 12%

To find out the maximum possible value of working capital investment keeping the NPV positive, we can either do a hit an trial method or use the goal seek function of excel:

Unis the goal seek above screen shot shows that the NPV becomes 0 at a working capital investment of 596388 so any value below this will give a positive NPV keeping everything else constant

jeff jeffy answered 1 year ago

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