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.): Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.

Answer 1

Answer:

$4,355.26  

Explanation:

The net present value is the present value of future cash flows expected from the project minus the initial investment outlay

initial investment outlay=working capital investment = -$10,000

Years 1-5 cash inflow=$2,000

Year 6 cash inflow=normal cash inflows+release of working capital

Year 6 cash inflow=$2,000+$10,000=$12,000

the present value of a future cash flow=cash flow/(1+r)^n

n is 1 for year cash inflow 2 for year 2 cash inflow, 3 for year 3 cash inflow and so on

NPV=-$10,000+$2,000/(1+10%)^1+$2,000/(1+10%)^2+$2,000/(1+10%)^3+$2,000/(1+10%)^4+$2,000/(1+10%)^5+$12,000/(1+10%)^6

NPV=$4,355.26