Hi there here’s one of the questions in the mock exam that I keep getting wrong I’m usually good with npv calculations but I don’t know why I’m totally messing this one up. Can anyone tell me if i’m missing anything! An analyst estimates that a project requires $29,000 initial investment and working capital of $4,000 at start-up. In return the project is expected to generate after-tax cash flows of $10,000 per year for four-years. if the project has no salvage value at the end and firm’s hurdle rate is 10%, what’s the project’s npv? A -$1,301 B $1,101 C $1,431 I put down A as the answer but the correct answer is apparently C. I also thought that maybe the $4000 costs weren’t included but the solution says both costs are taken into account. Do I have the wrong setting on my calculator or is everyone getting this answer too?
I like this question! Reminded me of a very very old one… Here’s your calculation: Cf 0 = -33000 (29000+4000 Working Capital) Cf 1 to 3 = 10000 (PMT) Cf 4 = 10000+4000 (the working capital is freed up once the project is over. So its refunded. Remember, working capital keeps revolving. Thus at the end of year 4, there is no use for it as the project is now over and is considered an inflow) NPV = 1431 (Option C)
Haven’t taken the mock yet but the answer is A from my calculations… We’re either missing something or it’s in their errata… Which question was it?
I’m getting the same answer as you. It’s either a mistake or working capital is not supposed to go into the intial capital investment and rather be worked into the 10% hurdle rate. I have no idea. I’m sure it’s a mistake. Please email me if u get the right answer (naeem@afrihost.co.za)
thanks smileyface :))
i see we’ve found the solution. well done.
Thank you so much! I never knew that about working capital being refunded at the end. Good Job SmileyFace