Question

A new, more efficient machine will last 4 years and allow inventory levels to decrease by $100,000 during its life. at a cost of capital of 13%, how does the net working capital change affect the project's npv

Answer 1

1st year: = $ 500,000
2nd year: 500,000 x 1.05 = 525,000
3rd year: 525,000 x 1.05 = 551,250
Revised forecast 1,576,250
Less: Initial forecast – 1,500,000
Equals: Change in forecast = $ 76,250

Answer 2

Capital budgeting analysis focuses on cash flow as opposed to profits.