A project will produce an operating cash flow of $7,300 a year for three years. The initial cash outlay for equipment will be $11,600. The net aftertax salvage value of $3,500 will be received at the end of the project. The project requires $800 of net working capital that will be fully recovered. What is the net present value of the project if the required rate of return is 11 percent?

Hi, we need to add all cash flows (inflows and out flows) for every year and finally bring them to present value to the given discount rate (required rate of return).

Following the structure of the question, everything should look like this.

year 0 year 1 year 2 year 3

Operating Cash Flow $7,300.00 $7,300.00 $7,300.00

Investment

Equipment -$11,600.00 $3,500.00

Net working capital -$800.00 $800.00

Cash Flow -$12,400.00 $7,300.00 $7,300.00 $11,600.00

In year 0, we have the invesment, which is the equipment ($11600) and the net working capital ($800), they are negative because they are cash out flows. In years 1 and 2, all we have is the operating cash flows ($7300). Finally, in year 3 we have to add the operating cash flow to the after tax salvage value of the equipment and the recovery of the working capital.

Now that we have the cash flow, we have to find the net present value, discounted at 11%. Everything should look as follows.

[tex]NPV=-12400+\frac{7300}{(1+0.11)^{1} } +\frac{7300}{(1+0.11)^{2} }+\frac{11600}{(1+0.11)^{3} }=8583.24[/tex]

Best of luck.