# Net Present Value and Washington State University

9 September 2016

Washington State University Finance 325 Practice Problems 1. What is the net present value of a project with the following cash flows and a required return of 12 percent? Year 0 1 2 3 Cash Flow -\$28,900 \$12,450 \$19,630 \$ 2,750 2. What is the net present value of a project that has an initial cash outflow of \$12,670 and the following cash inflows? The required return is 11. 5 percent. Year 1 2 3 4 Cash Inflows \$4,375 \$ 0 \$8,750 \$4,100 3. A project will produce cash inflows of \$1,750 a year for four years.

The project initially costs \$10,600 to get started. In year five, the project will be closed and as a result should produce a cash inflow of \$8,500. What is the net present value of this project if the required rate of return is 13. 75 percent? 4. You are considering the following two mutually exclusive projects. The required rate of return is 11. 25 percent for project A and 10. 75 percent for project B. Which project should you accept and why? Year 0 1 2 3 Project A -\$48,000 \$18,400 \$31,300 \$11,700 Project B -\$126,900 \$ 69,700 \$ 80,900 \$ 0 5.

## Net Present Value and Washington State University Essay Example

You are considering two mutually exclusive projects with the following cash flows. Will your choice between the two projects differ if the required rate of return is 8 percent rather than 11 percent? If so, what should you do? Year 0 1 2 3 Project A -\$240,000 \$ 0 \$ 0 \$325,000 Project B -\$198,000 \$110,800 \$ 82,500 \$ 45,000 6. A project will produce an operating cash flow of \$7,300 a year for three years. The initial cash investment in the project will be \$11,600. The net after-tax salvage value is estimated at \$3,500 and will be received during the last year of the project’s life.

What is the net present value of the project if the required rate of return is 11 percent? 1 Washington State University Finance 325 7. A project is expected to create operating cash flows of \$22,500 a year for three years. The initial cost of the fixed assets is \$50,000. These assets will be worthless at the end of the project. An additional \$3,000 of net working capital will be required throughout the life of the project. What is the project’s net present value if the required rate of return is 10 percent? 8.

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 \$15,000. Accounts payable will decrease by \$10,000. The project requires the purchase of equipment at an initial cost of \$120,000. 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 percent? Answer Keys 1. NPV = ? \$28,900 + \$12,450 \$19,630 \$2,750 ; NPV = -\$177. 62 (negative) + + 1 2 (1 + . 12) (1 + . 12) (1 + . 12) 3 2. NPV = ? \$12,670 + NPV = \$218. 68 3. NPV = ? \$10,600 + NPV = -\$1,011. 40 \$4,375 \$0 \$8,750 \$4,100 + + + 1 2 3 (1 + . 115) (1 + . 115) (1 + . 115) (1 + . 115) 4 \$1,750 \$1,750 \$1,750 \$1,750 \$8,500 + + + + 1 2 3 4 (1 + . 1375) (1 + . 1375) (1 + . 1375) (1 + . 375) (1 + . 1375) 5 4. NPVA = ? \$48,000 + \$18,400 \$31,300 \$11,700 + + ; NPVA = \$2,326. 46 1 2 (1 + . 1125) (1 + . 1125) (1 + . 1125)3 \$69,700 \$80,900 NPVB = ? \$126,900 + + ; NPVB = \$1,991. 56 1 (1 + . 1075) (1 + . 1075) 2 Difference in NPVs = \$2,326. 46 – \$1,991. 56 = \$334. 90 The answer states that the NPV of Project A exceeds the NPV of project B by about \$335. 5. At 8 percent, Project A has the higher NPV. At 11 percent, Project B has the higher NPV. 6. \$8,798. 29 7. \$5,208. 11 8. \$27,958. 66 2 Washington State University Finance 325 3

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