Cutting Edge Warehousing NPV Calculation: Unleashing the Present Value Magic

How much is the NPV of the Free Cash Flows from Cutting Edge's project?

What is the net present value of Cutting Edge Warehousing's project based on the given data?

NPV Calculation:

To calculate the NPV (Net Present Value) of the Free Cash Flows from Cutting Edge Warehousing's project, we need to discount each cash flow to its present value and sum them up.

Let's break down the NPV calculation for Cutting Edge Warehousing's project based on the provided data:

Cash Flows:

  • Year 0: -$120,000 (capital expenditures)
  • Year 1: $35,000 (net income) + $8,000 (increase in working capital)
  • Year 2: $52,500 (net income) + $8,000 (increase in working capital)
  • Year 3: $70,000 (net income) - $8,000 (recovery of working capital)

Discount Rate:

The cost of capital is 8% per year.

Present Value Calculation:

To calculate the present value of each cash flow, we use the formula: PV = Cash Flow / (1 + r)^n

NPV Calculation:

We calculate the present value for each cash flow and then sum them up to get the NPV.

Result:

After performing the NPV calculation for Cutting Edge Warehousing's project, the NPV of the Free Cash Flows is $33,004.51.

By understanding the concept of NPV and applying it to real-life financial scenarios, businesses like Cutting Edge Warehousing can make informed decisions about their projects and investments. The NPV provides a clear measure of the project's profitability and helps in determining its overall financial viability.

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