Question

Sol’s Sporting Goods is expanding and, as a result, expects additional operating cash flows of $26,000 a year for 4 years. This expansion requires $39,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires an additional $3,000 of net working capital throughout the life of the project; Sol expects to recover this amount at the end of the project. What is the net present value of this expansion project at a 16-percent required rate of return?

Answer 1

Answer:

NPV of the project = $32,404

Explanation:

Provided information we have,

Cash outflow in investment = $39,000

Cash inflow = $26,000 for 4 years

Working capital required = $3,000 through out the life.

Thus, at the beginning of year cash outflow = $39,000 + $3,000 = $42,000

Provided rate of return = 16%

Present value interest factor for 4 years = 2.798

Present value of cash inflow = $2.798 $\times$ $26,000 = $72,748

Present value of working capital = $3,000 $\times$ 0.552 = $1,656

Total PV of cash inflow = $74,404

Less: PV of cash outflow = $42,000

NPV of the project = $32,404