Middlefield Motors is considering a project that would last for 3 years and have
ID: 2760700 • Letter: M
Question
Middlefield Motors is considering a project that would last for 3 years and have a cost of capital of 10.22 percent. The relevant level of net working capital for the project is expected to be 17,000 dollars immediately (at year 0); 9,000 dollars in 1 year; 39,000 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 58,000 58,000 55,000 Cash flows from capital spending (in dollars) -117,000 0 0 4,000Explanation / Answer
Details Year 0 Year 1 Year 2 Year 3 a Cash Flows from Capital Spending (117,000) - - 4,000 Net Working Capital requirement (17,000) (9,000) (39,000) - b Investment in Net working capital (17,000) 8,000 (30,000) 39,000 c Operating Cash Flows - 58,000 58,000 55,000 Net Cash Flows =a+b+c= (134,000) 66,000 28,000 98,000 PV Factor @10.22%= 1 0.907 0.823 0.747 PV of Net Cash Flows (134,000) 59,880 23,048 73,189 NPV = $ 22,117.29 So NPV of the project is = $ 22,117.29