Net present value

Your firm currently has net working capital of $100,000 that it expects to grow at a rate of 4% per year forever. You are considering some suggestions that could slow that growth to 3% per year. If your discount rate is 12%, how would these changes affect the value of your firm?

Aberdeen Outboard Motors is contemplating building a new plant. The company anticipates that the plant will require an initial investment of $2 million in net working capital today. The plant will last 10 years, at which point the full investment in net working capital will be recovered.

Given an annual discount rate of 6%, what is the net present value of this working capital investment?

Solution:

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