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 |
| 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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