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

Quizplus · Accepted Answer

The recovery amount attributable to net working capital at the end of the project is 20% of the annual sales, which is $2 million. Therefore, 20% of $2 million is $400,000. However, since the question asks for the recovery amount, which is the total net working capital recouped, the correct answer is $240,000, which is 20% of the total sales over the project's life.

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