An all equity financed project has a 5-year life and is expected to generate the following net income:

year 1: $64
year 2: $49
year 3: $63
year 4: $102
year 5: $105

The project has no investment in property, plant and equipment (the production facilities are leased).

There is a time 0 investment in net working capital for the project of $15 and then as follows over the life of the project:

year 1: $16
year 2: $17
year 3: $14
year 4: $19
year 5: $21

All working capital accounts are zeroed out immediately at the end of the project.

The project cost of capital is 5.0%. The tax rate is 10%.

How much lower is the project NPV calculated based on expected cash flows vs the project NPV based on expected NI? Give your answer to the nearest whole dollar.

Selected Answer:	'
Correct Answer:	3 ± 1

Response Feedback:

The NPV based on cash flows is lower than the NPV based on net income, so your answer should be a positive number. i.e., "the NPV will be $10 lower"