Question

29. DuCo is considering investing $500,000 in a project. The life of the project would be 9 years. The project would require additional working capital of $50,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $150,000. The salvage value of the assets used in the project would be $5,000. The company uses a discount rate of 17%. The Present Value of $1 at this rate is 0.243 and the Present Value of an Annuity of $1 in Arrears at this rate is 4.451. Required (Show your work): Compute the net present value of the project

Answer 1

Solution: Computation of the net present value of the project Given that, Present value of $1 at the rate of 17% for 9 years = 0.243 Present value of an Annuity of $1 at the rate of 17% for 9 years = 4.451 Cost of the project = $500,000 Working capital of the project = $50,000 Working capital of the project is realised at the end of the project. Annual net cash flows = $150,000 Slavage value = $5,000 Net present value of the project = present value of cash in flows - Total cash out flows Total Cash out flows = $500,000+ $50,000 = $550,000 Present value of cash in flows = present value of Annual net cash flows for 9 years + present value of salvage value + present value of working capital which is received at the end of the project. Present value of cash in flows = ($150,000 x 4.451)+($5,000 x 0.243) + ($50,000 x 0.243) Present value of cash in flows = $667,650 + $1,215 + $12,150 Present value of cash in flows = $681,015. Net present value of the project = present value of cash in flows - Total cash out flows Net present value of the project = $681,015 - $550,000 = $131,015. Net present value of the project = $131,015.