Question

An office building is expected to create operating cash flows of $33,500 a year for three years, based on tenants' rental income. The purchase of the fixed assets for this building will cost $69,000. These assets will have no value at the end of the project. An additional $5,000 of net working capital will be required throughout the life of the project. Calculate the net present value of this project if the required rate of return is 8 percent?

Multiple Choice

• $21,301.91

• $11,301.91

• $16,301.91

• $3,812.50

• $12,332.75

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Answer 1

Initial investment cost

Initial investment cost = Cost of the fixed asset + Working capital required

= $69,000 + $5,000

= $74,000

Present value of the annual cash inflows

Year	Annual cash inflow ($)	Present Value factor at 8.00%	Present Value of Annual cash inflow ($)
1	33,500	0.925926	31,018.52
2	33,500	0.857339	28,720.85
3	38,500 [33,500 + 5,000]	0.793832	30,562.54
TOTAL			90,301.91

Net Present Value (NPV) of the Project = Present Value of annual cash inflows - Initial Investment cost

= $90,301.91 - $74,000

= $16,301.91

“Hence, the Net Present Value (NPV) of the Project will be $16,301.91”

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.