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 8.84 percent. The relevant level of net working capital for the project is expected to be 19,000 dollars immediately (at year 0); 9,000 dollars in 1 year; 35,000 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 2 Operating cash flows (in dollars) 0 66,000 63,000 51,000 Cash flows from capital spending (in dollars) -152,000 0 0 18,000

Explanation / Answer

Calculation of NPV Year Operating Cash Flow Cash Flow from Capital Spending Change in Working Capital Net Cash Flows PV FACTOR @ 8.84% Present Values of Cash Flows 0 0 -152000 -19000 -171000 1 -171000 1 66000 0 10000 76000 0.919 69827.27 2 63000 0 -26000 37000 0.844 31233.79 3 51000 18000 35000 104000 0.776 80661.77 NPV 10722.83

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