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ExerCyte has decided to build up inventory this year in expectation of future sales increases. ExerCyte...

ExerCyte has decided to build up inventory this year in expectation of future sales increases. ExerCyte plans to increase inventory in 2020 by $10,000, before decreasing inventory by $5,000 in 2021 and $5,000 in 2022 to return to normal levels. How will this change impact net working capital (NWC) and net cash flow (NCF) in 2020? Assuming a cost of capital of 15%, how will this inventory increase and subsequent decrease impact the net present value (NPV) of ExerCyte's project?

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Answer #1
NWC will increase by $10,000 in 2020 and decrease by
$5,000 in 2021 and by another $5,000 in 2022.
Net cash flow will decrease by $10,000 in 2020, and,
increase by $5,000 in 2021 and by another $5,000 in 2022.
The impact on NPV = -10000/1.15+5000/1.15^2+5000/1.15^3 = $            (1,627.35)
Note:
In the calculations for impact on NPV it has been assumed that
the changes in NWC occur at the end of 1st, 2nd and 3rd year.
If the changes in NWC occur at the beginning of those years, the
impact on NPV will be = -10000+5000/1.15+5000/1.15^2 = $            (1,871.46)
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