Question

Net working capital is expected to increase by $25,000 in year 5 of a project. If this extra working capital is recovered when the project ends in year 6, what is the effect on the project's net present value, if the cost of capital is 15%

Answer 1

Answer:

c. NPV will decrease by $1,621.23.

Explanation:

Missing word "Hint: what happens to cash flow when net working capital increases and decreases? a. NPV will not be affected because the $25,000 will all be recouped b. NPV will decrease by $25,000. c. NPV will decrease by $1,621.23. d. NPV will increase by $1,864.41. 19"

Present Value of Net Working Capital investment in Year 5 = $25000 / (1+15%)^5

= -$25,000 / (1+15%)^5

= -$25,000 / 2.01135719

= -$12,429.418

= -$12,429.42

Present Value of Net Working Capital Recovered in Year 6 = $25000 / (1+15%)^6

= $25,000 / (1+15%)^6

= $25,000 / 2.31306077

= $10,808.1899

= $10,808.19

Effect on the project's net present value = Present Value of Net Working Capital investment in Year 5 + Present Value of Net Working Capital Recovered in Year 6

= -$12,429.42 + $10,808.19

= -$1,621.23

Therefore, NPV will decrease by $1,621.23.