Louie's Leisure Products is considering a project which will require the purchase of $1.4 million in new equipment. The equipment belongs in a 20% CCA class. Louie's expects to sell the equipment at the end of the project for 20% of its original cost. Annual sales from this project are estimated at $1.2 million. Net working capital equal to 20% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 14% rate of return on this project. The tax rate is 34%.

What is the recovery amount attributable to net working capital at the end of the project?

Question

What is the recovery amount attributable to net working capital at the end of the project?

Quizplus · Accepted Answer

The recovery amount attributable to net working capital at the end of the project is calculated as 20% of annual sales, which is 20% of $1.2 million = $240,000. This is the amount of net working capital that will be recouped at the end of the project.

Louie's Leisure Products Is Considering a Project Which Will Require