Question

Newton Industries is considering a project that is expected to produce sales of $427,000 a year for three years and have a profit margin of 3.0 percent. The project requires an initial investment of $57,500 in fixed assets which will be depreciated on a straight-line basis to zero over the life of the project. The project is expected to increase accounts receivable by $15,950, decrease accounts payable by $8,500, and decrease inventory by $7,800. What is the project's cash flow at time zero if the tax rate is 34 percent? (Hint: Decrease in inventory would mean you got cash inflow (as inventory would decrease if you sell), increase in accounts receivable means you sold on credit, so it is negative cash flow to you, decrease in accounts payable would mean you paid bills, so again negative cash flow to you)

Answer 1

This is the indirect method of calculating cash flow.

Since this for the time period 0, there will be no profit, tax, and depreciation.

Statement of cash flow for the time 0

Initial investment		($57,500)
Adjustments for working capital changes:
Increase in accounts receivable, asset	($15,950)
Decrease in accounts payable, liability	($8,500)
Decrease in inventory, asset	$7,800
Net effect		($16,650)
Cash flow from the project		($74,150)

Note: All amounts within a bracket are negative figures. Amounts are rounded to whole number.

Answer: -$74,150