Question

Hollister & Hollister is considering a new project. The project will require $522,000 for new fixed...

Hollister & Hollister is considering a new project. The project will require $522,000 for new fixed assets, $218,000 for additional inventory, and $39,000 for additional accounts receivable. Short-term debt is expected to increase by $165,000. The project has a 6-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 20 percent 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 $875,000 with costs of $640,000. The tax rate is 34 percent and the required rate of return is 14 percent. What is the project's cash flow at time zero?

a.

-$614,000

b.

-$779,000

c.

-$944,000

d.

-$536,000

e.

-$720,000

What is the cash flow recovery from net working capital at the end of this project?

a.

$344,000

b.

$92,000

c.

$75,000

d.

$422,000

e.

$14,000

Homework Answers

Answer #1
ans 1 Computation of cash flow at time zero
new fixed assets 522,000
inventory 218,000
Account receivable 39,000
Short term debt -165,000
cash outflow at time zero 614,000
Answer = option a= -614,000
ans 2 cash flow recovery from net working capital at the end of this project
inventory 218,000
Account receivable 39,000
Short term debt -165,000
92,000
ans is option b) 92,000
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