Choi is expanding and expects operating cash flows of 26000

Choi is expanding and expects operating cash flows of $26,000 a year for 4 years as a result. The expansion requires $39,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $3,000 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required of return of 16 percent? Show your work please.

Solution

Year

Cash flows = CF

Depreciation = D = 39000/4 =

Working capital adjustment = WC

Net cash flow* = (CF-D)x(1-Tax rate)+D+WC

Discount factor = Df = 1/(1+16%)^Year

Present Values

CF

D

WC

NCF = (CF-D)x(1-0%)+D+WC

Df

=Df x NCF

0

-39000.00

0.00

-3000.00

-42000.00

          1.000000

-42000.00

1

26000.00

9750.00

0.00

26000.00

          0.862069

22413.79

2

26000.00

9750.00

0.00

26000.00

          0.743163

19322.24

3

26000.00

9750.00

0.00

26000.00

          0.640658

16657.10

4

26000.00

9750.00

3000.00

29000.00

          0.552291

16016.44

Total = NPV =

        32,409.57

Year	Cash flows = CF	Depreciation = D = 39000/4 =	Working capital adjustment = WC	Net cash flow* = (CF-D)x(1-Tax rate)+D+WC	Discount factor = Df = 1/(1+16%)^Year	Present Values
	CF	D	WC	NCF = (CF-D)x(1-0%)+D+WC	Df	=Df x NCF
0	-39000.00	0.00	-3000.00	-42000.00	1.000000	-42000.00
1	26000.00	9750.00	0.00	26000.00	0.862069	22413.79
2	26000.00	9750.00	0.00	26000.00	0.743163	19322.24
3	26000.00	9750.00	0.00	26000.00	0.640658	16657.10
4	26000.00	9750.00	3000.00	29000.00	0.552291	16016.44
					Total = NPV =	32,409.57