Question

Question 8 10 points Assume a company has a cost of capital that is greater than zero and has cash flows related to the changes in net working capital as follows: Year 0 = -10,000, Year 1 = +4,000, Year 2 = +4,000, Year 3 = +2,000 Given the above information, if NWC requirements doubled (i.e. each year's NWC were twice as much), what would be the impact on NPV? O A Decrease B. Increase c. No impact The information provided is insufficient to make a decision.

Answer 1

Lets cost of capital be 10%

NPV under current situation will be

YEAR	CASHFLOW	DISCOUNT FACTOR @10%	PRESENT VALUE
0	-10,000	1.0000	-10000.00
1	4000	0.9091	3636.40
2	4000	0.8264	3305.60
3	2000	0.7513	1502.55
		NPV =	-1555.45

NPV under revised situation (twice the amount) will be

YEAR	CASHFLOW	DISCOUNT FACTOR @10%	PRESENT VALUE
0	-20,000	1.0000	-20000.00
1	8000	0.9091	7272.80
2	8000	0.8264	6611.20
3	4000	0.7513	3005.09
		NPV =	-3110.91

So NPV will decrease (option A) when the amount of NWC were twice in each year