Hollister & Hollister is considering a new project. The project will require $54

Question

Hollister & Hollister is considering a new project.

The project will require $543,000 for new fixed assets, $218,000 for additional inventory, and $42,000 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 13 percent.

What is the project's cash flow at time zero?

Explanation / Answer

Depreciation on Fixed Assets Initial cost 543000 Less: Salvage value 108600 434400 Useful life in Yrs. 6 Depn. SLM 72400 Calculation of annual inflows Annual sales 875000 Less : Costs 640000 Net Income 235000 Less Tax @34% on235000 79900 Income after tax 155100 Add : Tax shield on depn 24616 Net annual cash flow 179716 Year Details Outflow/inflow PV F @ 13% PV 0 Investment on Fixed assets -543000 1 -543000 Additional inventory -218000 1 -218000 Additional Accts.receivables -42000 1 -42000 Short-term debt 165000 1 165000 1 Annual cash flows 179716 0.88496 159041 2 179716 0.78315 140745 3 179716 0.69305 124552 4 179716 0.61332 110223 5 179716 0.54276 97543 6 179716 0.48032 86321 6 Sale of fixed asset 108600 0.48032 52163 6 Restoration of Net W/C 95000 0.48032 45630 6 PROJECT CASH FLOW @ time 0 178219 NPV @ time 0 $178,219 Initial cash flow @ time 0 543000+218000+42000-165000 ie.638000

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