The following data concern an investment project (Ignore income taxes.): Investment in equipment$180,000 Annual net cash inflows$42,000 Salvage value of the equipment$70,000 Working capital required$20,000 Life of the project 5yearsRequired rate of return 12%The working capital will be released for use elsewhere at the conclusion of the project.Refer to Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Compute the project's net present value.
What will be an ideal response?
| Year | |||||||||
| Now | 1-5 | 5 | |||||||
| Initial investment | $ | (180,000 | ) | ||||||
| Working capital | $ | (20,000 | ) | $ | 20,000 | ||||
| Annual net cash flow | $ | 42,000 | |||||||
| Salvage value | $ | 70,000 | |||||||
| Total cash flows (a) | $ | (200,000 | ) | $ | 42,000 | $ | 90,000 | ||
| Discount factor (12%) (b) | 1.000 | 3.605 | 0.567 | ||||||
| Present value of cash flows (a) × (b) | $ | (200,000 | ) | $ | 151,410 | $ | 51,030 | ||
| Net present value | $ | 2,440 | |||||||
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