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Bruno's Lunch Counter is expanding and expects operating cash flows of $24,600 a year for 6 years as a result. This expansion requires $76,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $6,000 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 10 percent

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Zviko

Answer:

The net present value of this expansion project at a required rate of return of 10 percent is $11,284.40.

Explanation:

The Summary of Cash flows are as follows :

Year 0    

Cash Flows ($76,000 + $6,000)  =  - $82,000

Year 1

Cash Flow = $24,600

Year 2

Cash Flow = $24,600

Year 3

Cash Flow = $24,600

Year 4

Cash Flow = $24,600

Year 5

Cash Flow = $24,600

Year 6

Cash Flow ($24,600 + $6,000)  = $30,600

Note that the net working capital is recouped at the end of the project.

Calculation of net present value of this expansion project

Note : I am using a financial calculator here

- $82,000     CFj

$24,600      CFj

$24,600      CFj

$24,600      CFj

$24,600      CFj

$24,600      CFj

$30,600      CFj

10 %              i/yr

Shift NPV = $11,284.40

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