Here we have been provided with the information that,

Working capital investment is 25% of the anticipated first year sales for Wally’s Waffle House.

The first-year sales are currently projected at $4,300,000.

The incremental cash flow (not including working capital investment) is

Initial cash flow = $13,700,000

outflow Cash flow years 1 through 10 = $2,850,000

Weighted average cost of capita=15%

Now we will find out internal rate of return of the ten-year project with working capital factored into the cash flow as follow

IRR

CF0 = -$13,700,000 – 0.25 × $4,300,000

= -$14,775,000

CO1

= $2,850,000

FO1 = 9

CO2 = $2,850,000 + 0.25 × $4,300,000

= $3,925,000

IRR = 14.64%

(here I have used a financial calculator)

Now we will find NPV

NPV = -$14,775,000 + $2,850,000 × (1 – 1/1.159 ) / 0.15 + $3,925,000 / 1.1510

NPV = -$14,775,000 + $13,599,014.17 + $970,199.97

= -$205,786

Comments:

Here NPV is Negative so the project is a no-go! Wally’s Waffle House should reduce its working capital for covering net loss of dollar 205,786. For each additional dollar for reduceding a spending on the working capital they get $1/1.1510 in the return or a net present cash outflow of $1 – $0.2472 = $0.7528.

If the current NPV is (- $205,786 )they should need to reduce the working capital spending by dollar 205,786/0.7528 = $273,355 here you need not for rounding $0.7528 to get this number

Current spending are $1,075,000 & therefore you must have to reduce the current working capital to $801,645. If you could reduce working capital by dollar 273,355 you have following cash flow:

CF0 = -$13,700,000 – 0.25 × $4,300,000 + $273,355

= -$14,501,645

CO1 = $2,850,000

FO1 = 9

CO2 = $2,850,000 + 0.25 × $4,300,000 – $273,355 = $3,651,645

Then the NPV will be zero at 15%

NPV = -$14,501,645 + $2,850,000 × (1 – 1/1.159 ) / 0.15 + $3,651,645 / 1.1510

NPV = -$14,501,645 + $13,599,014 + $902,631

= $0