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 present value of the net working capital changes associated with the project?
The project is expected to last 7 years.

Question

Quizplus · Accepted Answer

The present value of the net working capital changes associated with the project is -$144,087. This is calculated as follows:Initial net working capital = 20% of $1.2 million = $240,000Terminal net working capital = 0Change in net working capital = $240,000 - $0 = $240,000Present value of change in net working capital = $240,000 / (1 + 0.14)^7 = -$144,087

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