A company is embarking on a "lean" initiative -- they plan to do more with less. The lean initiative will reduce inventory levels and reduce net working capital in the operation for each of the years shown below. There will be no impact to costs or revenues. Free cash flows from this improvement are forecasted as shown below. There is no terminal value because the company will maintain the reduced inventory level indefinitely. The company has a 10% cost of capital (i.e., the required rate of return is 10%). What is the value of this lean initiative measured in today's money?

 

Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Initial Investment	$100,000	$200,000	$300,000	$400,000	$500,000

Answer rating: 100% (QA)

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