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 initial cost of this project?

Question

What is the initial cost of this project?

Quizplus · Accepted Answer

The initial cost of the project includes the investment in fixed assets, additional inventory, and additional accounts receivable, minus the increase in accounts payable. Therefore, the calculation is $325,000 (fixed assets) + $160,000 (inventory) + $35,000 (accounts receivable) - $100,000 (accounts payable) = $420,000. Long-term debt does not affect the initial cost calculation as it is a financing activity.

Margarite's Enterprises Is Considering a New Project