Margarite's Enterprises is considering a new project. The project will require $325,000 for new fixed assets, $160,000 for additional inventory and $35,000 for additional accounts receivable. Accounts payable is expected to increase by $100,000 and long-term debt is expected to increase by $300,001. The project has a 5-year life. The fixed assets will belong in a 30% CCA class. At the end of the project, the fixed assets can be sold for 25% of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $554,000 and costs of $430,001. The tax rate is 35% and the required rate of return is 15%. What is the cash flow recovery from net working capital at the end of this project?

Question

Quizplus · Accepted Answer

The cash flow recovery from net working capital at the end of the project is the initial investment in net working capital that is recovered. The initial net working capital investment is the increase in inventory ($160,000) plus the increase in accounts receivable ($35,000) minus the increase in accounts payable ($100,000), which equals $95,000. This amount is recovered at the end of the project when the net working capital returns to its original level.

Margarite's Enterprises Is Considering a New Project