Louie's Leisure Products is considering a project which will require the purchase of $1.4 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. 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 of $1.2 million, which is $240,000. Since all of the net working capital will be recouped at the end of the project, the recovery amount is $240,000.

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