question archive What is the net present value of the zippered-glove project, which is a 3-year project where GlivCo would make and sell zippered gloves? The project would involve an initial investment in equipment of $136,000 today
What is the net present value of the zippered-glove project, which is a 3-year project where GlivCo would make and sell zippered gloves? The project would involve an initial investment in equipment of $136,000 today
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What is the net present value of the zippered-glove project, which is a 3-year project where GlivCo would make and sell zippered gloves? The project would involve an initial investment in equipment of $136,000 today. To finance the project, GlivCo would borrow $136,000. The firm would receive $136,000 from the bank today and would pay the bank $180,000 in 3 years (consisting of an interest payment of $44,000 and a principal payment of $136,000). Cash flows from capital spending would be $0 in year 1, $0 in year 2, and $47,000 in year 3. Operating cash flows are expected to be $87,000 in year 1, -$12,000 in year 2, and $31,000 in year 3. The cash flow effects from the change in net working capital are expected to be ?$11,000 at time 0; $4,000 in year 1; -$9,000 in year 2, and $16,000 in year 3. The tax rate is 35 percent. The cost of capital is 5.08 percent and the interest rate on the loan would be 8.03 percent.
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Answer:
| Year 0 | Year 1 | Year 2 | Year 3 | |||
| Operating cash flows | 87,000 | (12,000) | 31,000 | |||
| Initial investment in equipment | (136,000) | |||||
| Cash flows from capital spending | - | - | 47,000 | |||
| Change in net working capital | (11,000) | 4,000 | (9,000) | 16,000 | ||
| Total cashflows | (147,000) | 91,000 | (21,000) | 94,000 | ||
| PVF @ 5.08% | 1.000 | 0.952 | 0.906 | 0.862 | ||
| Discounted Cashflows | (147,000) | 86,601 | (19,019) | 81,015 | 1,597 | NPV |
Assumed Operating cash flows are after tax cashflows.
