Question

Note: This is a question form the capital budgeting chapter (Ch. 10)! Assume that you are looking at an investment opportunity that offers an annual operating cash flow of $40,000 per year for 4 years. The initial investment to purchase the necessary equipment is $200,000. You assume that you can sell the equipment at the end of 4 years for $70,000. Also, initially there is a need for an investment in net working capital of $15,000, but this increases to $35,000 in year 1. If your required rate of return is 5% and the tax rate is 35%, what is the NPV? Multiple Choice Yes, because the NPV is $3,230,00 Yes, because the NPV is $30,000.00 No, because the NPV is $5,825.84

Answer 1

1 2 4 -200,000 40,000 40,000 Cash flow NPV Initial Investment Annual cash flows Ending cash flows After tax cash flows Net Working capital Change in NWC Working capital recovery Free cash flows Required rate NPV of cash flows 40,000 70,000 45,500 35000 35% 35000 35000 15000 15000 35000 20000 35000 120,500 -215,000 20,000 40,000 40,000 5% $ -25,982.05

Answer is No , as the NPV is negative at $ -25,982.05

Formulae