CFA Practice Question

CFA Practice Question

Firm WRW Inc. is considering a project to produce a new line of office tables. WRW expects that the production of the new line of office tables will require it to increase Net Working Capital (NWC) by $5 million. The project will last for 3 years, after which the $5 million NWC will be freed up (returned to the firm). During these five years, the $5 million NWC will earn no interest. The rate of discount for the project is 8%. In calculating NPV:
A. there will be no impact from increase in NWC as it is returned at the end of the project.
B. the impact of $5 million increase in NWC will be -$5 million.
C. the impact of $5 million increase in NWC will be -$1.03 million.
Explanation: Net impact of NWC = -NWC + (Discounted value of NWC recovered) = -5M + (5M/1.08^5)

User Contributed Comments 1

User Comment
drew2009 One part of the question results in T=3years and other part suggest T=5 years.
When you work the equation it need to be (5MM/1.08^3) for you to obtain the correct answer.
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