Bruno's Lunch Counter is expanding and expects operating cash flows of $30,900 a year for 6 years as a result. This expansion requires $99,500 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $7,600 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 13 percent?

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TomShelby TomShelby · Answer 1 · 2019-07-21T03:10:20+02:00

Answer:

NPV = $16,424.29

Explanation:

[tex]$ Net Present Value = Present Value Cash Flow - Investment Cost[/tex]

The first step: will be calculate the Present value of the net cash flow from the expansion

[tex]C * \frac{1-(1+r)^{-time} }{rate} = PV\\[/tex]

[tex]$30,900 * \frac{1-(1+0.13)^{-6} }{0.13} = PV\\[/tex]

PV = $123,524.29

Then we subtract the capital investment

$99,500 Expanding Cost and $7,600 Working Capital

The working capital will be needed for the entire life of the project from the start, so it is a beginning investment as much as the expansion cost.

Total Investment cost $107,100

Lastly, Net Present Value:

[tex]123,524.29 - 107,100 = 16,424.29[/tex]