Homework SourseBrunos Lunch Counter is expanding and expects operating cash
Bruno\'s Lunch Counter is expanding and expects operating cash flows of $20,800 a year for 5 years as a result. This expansion requires $57,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $5,000 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 14 percent?
$14,408
$12,005
$15,609
$17,653
$16,724
Solution
$12,005
Working:
| Net Present Value is calculated as follows: | |||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | Total | ||
| Operating cash flow | $ 20,800 | $ 20,800 | $ 20,800 | $ 20,800 | $ 20,800 | ||||
| Investment in new fixed assets | $ -57,000 | ||||||||
| Investment in net working capital | $ -5,000 | ||||||||
| Release of net working capital | $ 5,000 | ||||||||
| Total cash flow | $ -62,000 | $ 20,800 | $ 20,800 | $ 20,800 | $ 20,800 | $ 25,800 | |||
| Discount factor @ 14% | 1.0000 | 0.8772 | 0.7695 | 0.6750 | 0.5921 | 0.5194 | |||
| Present Value | $ -62,000 | $ 18,246 | $ 16,005 | $ 14,039 | $ 12,315 | $ 13,400 | $ 12,005 | ||
