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The project's expected NPV is about $60,000 and the probability of a negative NPV is about 20%
The project's expected NPV is about $60,000 and the probability of a negative NPV is about 20%. The project's IRR = 79.47% The project is certain to return an NPV - $0. The project will be repeated 20,000 times. Question 10 5 pts To get a project rolling, your firm offsets an inventory investment of $900,000 with $400,000 in accounts payable. If the project runs for 10 years before you are able to recover the net working capital and your discount rate is 10%, what is the opportunity cost of having that working capital tied up? $192,772 $1,300,000 $500,000 $501,206 $307,228
Expert Solution
To determine the opportunity cost we will compare their present value
PV at recovery time (at Year 10) = Working capital * PVF (10% , 10)
= ( Inventory - Payable ) * 1/(1+0.10 )10
= (900000 - 400000) * 0.38554
= $192772
PV at investment time (at Year0 ) = 500000
Loss of value (Opportunity Cost) = 500000 - 192772
= $307228
Therefore Correct answer is E
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