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A project is expected to create operating cash flows of $22,500 a year for three years. The initial cost of the fixed assets is $50,000. These assets will be worthless at the end of the project. An additional $3,000 of net working capital will be required throughout the life of the project. What is the project’s net present value if the required rate of return is 10%?

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Answer:

Net Present Value = $58,188 - $53,000 = $5,188

Explanation:

Net Present Value = Net Cash Inflow - Net Cash Outflow

Computing Net Cash Inflow Discounted @10% PV factor for each year =  [tex]\frac{1}{(1 + r){^n}}[/tex] Where, r = interest rate = 10%, and n = period that is for year 1 = 1 for year 2 = 2 and for year 3 = 3

Year            Cash Inflow           PV Factor        PV

1                    $22,500                0.909              $20,452.5

2                   $22,500                0.826              $18,585

3                   $22,500                0.751                $16,897.5

3                   $3,000                   0.751               $2,253 (Working capital will be realized at end of project)

Net Cash inflow                                                  = $58,188

Net Cash outflow = Cost of fixed asset + Cost of working capital initially incurred

                      = $50,000 +  $3,000 = $53,000

Net Present Value = $58,188 - $53,000 = $5,188

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