A project that involves an initial outlay of £200 000 on a machine is expected to generate annual profits of £60 000 (after deducting depreciation) each year for four years. Depreciation is calculated on an even (straight line) basis, assuming that the disposal proceeds of the original investment will be £40 000 receivable at the end of year 4. This means that the annual depreciation expense will be £40 000 [(£200 000 − £40 000)/4]. The initial cost is an outflow in year 0

(immediately) and the disposal proceeds are an additional inflow in year 4. The working capital requirement is estimated to be a constant £30 000. The estimated cash flows will be

and it is these figures that should be discounted, using an appropriate rate, to arrive at the NPV.

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01234 Year (230 000) (i.e. machine 200 000 + working capital 30 000) 100 000 (i.e. pre-depreciation profit 60 000 + depreciation 40 000) 100 000 100 000 170 000 (i.e. 100 000 + disposal proceeds 40 000+ working capital released 30 000)