2.
Homework Answers
Question No. - (1) - Answer -
Step - ( 1 ) - Information Given -
Cost of the Project = $640000.
Life of the project = 6 years.
The project would require additional working capital of $24000, which would be released for use elsewhere at the end of the project.
Annual net cash inflows = $158000.
Salvage value of the assets used in the project = $34000.
Discount rate = 18%.
.
Step - ( 2 ) - Calculation of the Net present value of the Project -
| Year | Particulars | Cash flow |
Calculation = [ cash flow / ( 1 + r )n ] here, r = 18% and n = 6 years |
Discounted cash flow |
| 0 | Cost of project | -$640000 | [ -$640000 / ( 1 + 0.18 )0 ] | -$640000 |
| 0 | Additional working capital | -$24000 | [ -$24000 / ( 1 + 0.18 )0 ] | -$24000 |
| 1 | Annual net cash inflow | $158000 | [ $158000 / ( 1 + 0.18 )1 ] | $133898 |
| 2 | Annual net cash inflow | $158000 | [ $158000 / ( 1 + 0.18 )2 ] | $113473 |
| 3 | Annual net cash inflow | $158000 | [ $158000 / ( 1 + 0.18 )3 ] | $96164 |
| 4 | Annual net cash inflow | $158000 | [ $158000 / ( 1 + 0.18 )4 ] | $81495 |
| 5 | Annual net cash inflow | $158000 | [ $158000 / ( 1 + 0.18 )5 ] | $69063 |
| 6 | Annual net cash inflow | $158000 | [ $158000 / ( 1 + 0.18 )6 ] | $58528 |
| 6 | Salvage value of the assets | $34000 | [ $34000 / ( 1 + 0.18 )6 ] | $12595 |
| 6 | Recovery of working capital | $24000 | [ $24000 / ( 1 + 0.18 )6 ] | $8890 |
| Net present value of the Project | -$89894 | |||
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