Question

Parks Corporation is considering an investment proposal in which a working capital investment of $10,000 would be required. The investment would provide cash inflows of $2,000 per year for six years. The working capital would be released for use elsewhere when the project is completed. If the company's discount rate is 10%, the investment's net present value is closest to (Ignore income taxes.):

Answer 1

Answer:

Net present Value 4,355.26

It is positive so it will yield a profit for Parks Corporation

Explanation:

NPV = present value of cash flow - investment

Investment 10,000

cash flow 2,000 pwer year for 6 year

the cash flow are the same during the life of the project so we consider the present value of an annuity:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 2000

time 6

rate 0.1

$2000 \times \frac{1-(1+0.1)^{-6} }{0.1} = PV$

PV $8,710.52

Next we have to conside the erase of the working capital

which is the present value of a lump sum of 10,000

$\frac{Maturity}{(1 + rate)^{time} } = PV$

Maturity 10,000

time 6

rate 0.1

$\frac{10000}{(1 + 0.1)^{6} } = PV$

PV  5,644.7393

Next step we calculate the present value:

8,710.52 +5,644.74 - 10,000 = 4,355.26