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. Short-term debt is expected to increase by $100,000 and long-term debt is expected to increase by $300,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. 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 $430,000. 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

To calculate the cash flow recovery from net working capital, we need to determine the initial net working capital and the net working capital at the end of the project.

Initial net working capital = Additional inventory + Additional accounts receivable - Short-term debt
Initial net working capital = $160,000 + $35,000 - $100,000 = $95,000

At the end of the project, the net working capital returns to its original level, so the cash flow recovery from net working capital is equal to the change in net working capital during the project.

Change in net working capital = $0 - $95,000 = -$95,000

However, since this is a cash inflow, we need to represent it as a positive number. Therefore, the cash flow recovery from net working capital is $95,000.

Option A is correct.

Margarite's Enterprises Is Considering a New Project