Middlefield Motors is considering a project that would last for 3 years and have
ID: 2732709 • Letter: M
Question
Middlefield Motors is considering a project that would last for 3 years and have a cost of capital of 9.88 percent. The relevant level of net working capital for the project is expected to be 22,000 dollars immediately (at year 0); 9,000 dollars in 1 year; 27,000 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 54,000 52,000 60,000 Cash flows from capital spending (in dollars) -128,000 0 0 10,000Explanation / Answer
Calculation of NPV :
Present Value of Cash Inflow : $ 197531.75
Intial Cash Outflow : $ 128000
Net Present Value = Present Value of Cash Inflow - Intial Cash Outflow
= 197531.75 - 128000
= $ 69531.75
Year Net Working Capital Operating Cash Flow Cash flows from capital spending Total Cash Inflow PV @ 9.88% PV of Cash Inflow 0 22000 0 0 22000 1.0000 22,000.00 1 9000 54000 0 63000 0.9101 57,335.27 2 27000 52000 0 79000 0.8283 65,431.94 3 0 60000 10000 70000 0.7538 52,764.53 TOTAL 1,97,531.75