A Project Will Produce Operating Cash Flows of $45,000 a Year

question 15

Multiple Choice

A project will produce operating cash flows of $45,000 a year for four years. During the life of the project, inventory will be lowered by $30,000 and accounts receivable will increase by $15,001. Accounts payable will decrease by $10,001. The project requires the purchase of equipment at an initial cost of $120,001. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $25,000 after-tax cash flow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 14%?

• A) $3,483.48
• B) $16,117.05
• C) $27,958.66
• D) $32,037.86
• E) $49,876.02

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Definitions:

IRR

Stands for Internal Rate of Return, which is a financial metric used to estimate the profitability of potential investments.

WACC

The Weighted Average Cost of Capital is a method of determining a corporation's cost of capital, with each capital category being weighted in accordance with its relative proportion.

IRR

Internal Rate of Return; a financial metric used to evaluate the profitability of potential investments, representing the discount rate that makes the net present value of all cash flows equal to zero.

Cash Flow

A measure of the amount of cash and cash-equivalents being transferred into and out of a business.