A pharmaceutical company is considering investing in a new production line of ey

Question

A pharmaceutical company is considering investing in a new production line of eye drops. Other than investing in the equipment, the company needs to increase its cash and cash equivalents by $10,000, increase the level of inventory by $30,000, increase accounts receivable by $25,000, and increase accounts payable by $5,000 at the beginning of the investment; the company will recover back these changes in working capital at the end of the project ten years later. Assume the appropriate discount rate to be 12 percent.

What are the relevant cash flows given the above information?

Explanation / Answer

Cash flow at the beginning of project = $(30000+25000+5000) = $ 60000

Present value at the end of project ll be = $ 60000/(1+12%)^10 = $ 19318.38

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