Middlefield Motors is considering a project that would last for 3 years and have
ID: 2731713 • Letter: M
Question
Middlefield Motors is considering a project that would last for 3 years and have a cost of capital of 13 percent. The relevant level of net working capital for the project is expected to be 18,000 dollars immediately (at year 0); 8,000 dollars in 1 year; 30,000 dollars in 2 years; and 0 dollars in 3 years. Relevant expected operating cash flows and cash flows from capital spending in years 0, 1, 2, and 3 are presented in the following table. What is the net present value of this project?
Time 0 Year 1 Year 2 Year 3
Operating cash flows (in dollars) 0 69,000 69,000 56,000
Cash flows from capital spending (in dollars) -147,000 0 0 13,000
Explanation / Answer
We first need to compute total cash flow for each year:
Year
capital spending
Operating cashflow
working capital
Total cash flow
0
-147000
0
-18000
-165000
1
0
69000
-8000
61000
2
0
69000
-30000
39000
3
13000
56000
56000
125000
Working capital is recaptured at the end of the project, this is why it is added in year 3.
Now we need to calculate PV of all cash flows and add them to get NPV.
Year
Total cash flow
PV factor 13%
PV
0
-165000
1
-165000.00
1
61000
0.8849558
53982.30
2
39000
0.7831467
30542.72
3
125000
0.6930502
86631.27
6156.29
Therefore, NPV would be 6,156.29.
Year
capital spending
Operating cashflow
working capital
Total cash flow
0
-147000
0
-18000
-165000
1
0
69000
-8000
61000
2
0
69000
-30000
39000
3
13000
56000
56000
125000