Schroeder Electronics is considering a project which will require the purchase of $5 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 5-year life of the project. Schroeder's expects to sell the equipment at the end of the project for 10% of its original cost. Annual sales from this project are estimated at $2.3 million. Net working capital equal to 10% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. Schroeder desires a 12% rate of return on this project. The tax rate is 40%.
-What is the recovery amount attributable to net working capital at the end of the project?

Question

Quizplus · Accepted Answer

To calculate the recovery amount attributable to net working capital, we first need to calculate the total net working capital required for the project.

Net working capital = 10% of annual sales = 0.1 x $2.3 million = $230,000

Since all of the net working capital will be recouped at the end of the project, the recovery amount attributable to net working capital will also be $230,000.

Therefore, the correct answer is (D) $230,000.

Schroeder Electronics Is Considering a Project Which Will Require the Purchase