Assume that you are looking at an investment opportunity that offers an annual operating cash flow of
$40,000 per year for 4 years. The initial investment to purchase the necessary equipment is $200,000.
You assume that you can sell the equipment at the end of 4 years for $70,000. Also, there is a need for
an investment in net working capital of $15,000. If your required rate of return is 5%, and the tax rate is
35%, would you accept this project?
A)
B)
C)
D)
E)
Yes, because the NPV is $3,230.00
Yes, because the NPV is $30,000.00
Yes, because the NPV is $5,500.15
No, because the NPV is -$3,230.24
No, because the NPV is -$23,388.48
Time
OCF
-Chg in NWC
- cap sp
CF
0
0
-15,000
-200,000
-215,000
Time
0
OCF
0
-Chg in NWC
-15,000
- cap sp
-200,000
CFA
-215,000
CF
CLR WORK
CF0 = -215,000
C01 = 40,000
F01 = 3
C02 = 100,500
F02 = 1
NPV
I=5
NPV CPT
NPV = -23,388.48
1
40,000
2
40,000
3
40,000
40,000
40,000
40,000
1
40,000
40,000
2
40,000
40,000
3
40,000
40,000
4
40,000
15,000
70,000(1-.35)
100,500
4
40,000
15,000
70,000(1-.35)
100,500
Assume that you are looking at an investment opportunity that offers an annual operating cash flow of
$40,000 per year for 4 years. The initial investment to purchase the necessary equipment is $200,000.
You assume that you can sell the equipment at the end of 4 years for $70,000. Also, initially there is a
need for an investment in net working capital of $15,000, but this increases to $35,000 in year 1. If your
required rate of return is 5% and the tax rate is 35%, what is the NPV?
A)
B)
C)
D)
E)
Yes, because the NPV is $3,230.00
Yes, because the NPV is $30,000.00
Yes, because the NPV is $5,500.15
No, because the NPV is -$25,982.05
No, because the NPV is -$23,388.48
Time
OCF
-Chg in NWC
- cap sp
CF
0
0
-15,000
-200,000
-215,000
1
40,000
-20,000
2
40,000
3
40,000
20,000
40,000
40,000
Note: in year 1, only the change in NWC is recorded (35,000-15,000=20,000)!
CF
CLR WORK
CF0 = -215,000
C01 = 20,000
F01 = 1
C02 =40,000
F02=2
C03 = 120,500
F03 = 1
NPV
I=5
NPV CPT
NPV = -25,982.05
4
40,000
35,000
70,000(1-.35)
120,500