Question

Zabarkes Corporation is considering a capital budgeting project that would require an initial investment of $640,000 and working capital of $79,000. The working capital would be released for use elsewhere at the end of the project in 3 years. The investment would generate annual cash inflows of $205,000 for the life of the project. At the end of the project, equipment that had been used in the project could be sold for $29,000. The company's discount rate is 7%. The net present value of the project is closest to:

Answer 1

Answer:

($92,857)

Explanation:

The computation of the net present value is shown below:

Items Year Amount of Cash inflow 7% factor Present value of cash flow

Initial Investment 0 $640,000                     1              (640,000)

Working capital required 0 $79,000              1              (79,000)

net annual cash inflows 1-3 $205,000              2.6243      $537,982

Working capital released 3 $79,000               0.8163  $64,488

Equipment Sold 3          $29,000               0.8163        $23,673

Net Present Value                                                                  ($92,857)

Refer to the discount table at 7%