Middlefield Motors is considering a project that would last for 3 years and have

Question

Middlefield Motors is considering a project that would last for 3 years and have a cost of capital of 5.37 percent. The relevant level of net working capital for the project is expected to be 24,000 dollars immediately (at year 0); 9,000 dollars in 1 year; 25,000 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 51,000 58,000 67,000 Cash flows from capital spending (in dollars) -153,000 0 0 11,000

Explanation / Answer

Schedule of net Present value:

Times 0 1 2 3 Working Capital -24000 -9000 -25000 0 Operating cash flows 0 51000 58000 67000 Cash flow from capital spending -153000 0 0 11000 Cash flow -177000 42000 33000 78000 Discount factor (5.37%) 1      0.949      0.901      0.855 Present value (177,000)    39,860    29,722    66,672 Net Present value     (40,746)

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