npv question

an analyst estimates that a project requires 29,000 initial investment and working capital of 4,000 at startup. in return, the project is expected to generate after-tax cash flows of 10,000 per year for 4 years. if the project has no salvage value at the end of the project and the firm’s hurdle rate is 10%, the project’s net present value is closest to: A. -1431 B. -1301 C. 1301 D. 1431 any thoughts?


CF 0 = -33,000 CF 1 = 10,000 CF 2 = 10,000 CF 3 = 10,000 CF 4 = 10,000 i = 10% NPV=?

well, according to the solutions, you have to treat the WC requirement both at the beginning of the analysis and the end, meaning -33,000 for the initial outflow is fine, however you also have to have 4,000 at the end, therefore discounting this total, we get 2700 or so (i don’t have the answer right in front of me this instant), which makes the answer D.

CF0 = -33 CF1=10 F01=3 CF2=14 FO2=1 I=10 NPV = 1431 Choice D. The WC is returned at the end of the project

It’s as easy as plugging values into a calculator. On a BA II it’s… CF0: -33,000 CF1:10,000 F1: 4 I: 10 NPV = ?

I shouldn’t do questions at work… Good call CPK

thought about returning the 4,000 for a while. ended up deciding the exhaustion of the WC was included in the CF’s. dnoyelles - can you confirm cpk’s answer if correct?

Why is the WC returned?

I had the same question with the wrong answer (I did not consider the 4000 WC at the end of the project life) when I did the BSAS 2007 I believe PM test in June…

Yeah, I had a corporate financial analysis class in college that specified returning WC at the end of the project. Hadn’t seen the concept in any CFA stuff… I think it’s safe to assume we won’t. However, I think CPK is correct.

CPK is correct. The WC is given at beginning, like a loan, and is returned at the end.

Oh it’s a loan from the company not initial investment capital BINGO!

I don’t want to confuse you…it’s not a loan, but you can think of it that way (i.e. its temporary)

Yeah - I didn’t think it was interest bearing, just a sub!