Net present value is calculated as present value of cash inflow less present value of cash outflow | |||||||
Calculation of net present value is shown below | |||||||
Year | 0 | 1 | 2 | 3 | |||
Incremental earnings | $32,500 | $32,500 | $32,500 | ||||
Add: Depreciation | $25,000 | $25,000 | $25,000 | ||||
Operating cash flow | $57,500 | $57,500 | $57,500 | ||||
Capital expenditure | -$75,000 | ||||||
Working capital | $0 | -$5,000 | $5,000 | ||||
Net cash flow | -$75,000 | $52,500 | $57,500 | $62,500 | |||
Discount factor @ 12% | $1.0000 | $0.8929 | $0.7972 | $0.7118 | |||
1/(1.12^0) | 1/(1.12^1) | 1/(1.12^2) | 1/(1.12^3) | ||||
Present value | -$75,000 | $46,875 | $45,839 | $44,486 | |||
Net present value | $62,200 | ||||||
Thus, net present value of new project is $62,200. | |||||||
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