Investment cash flows: Healthy Potions, Inc., is considering investing in a new

Question

Investment cash flows: Healthy Potions, Inc., 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 $56,020, increase accounts receivable by $25,000, and increase accounts payable by $5,000 at the beginning of the investment. Healthy Potions will recover these changes in working capital at the end of the project 9 years later. If the appropriate discount rate is 13.4 percent what is the net effect on the today's value of the project?

Explanation / Answer

increase in working capital = $10,000+$56,020+$25,000- $5,000 =86,020 net effect on the today's value of the project = -86,020 +86,020/1.134^9 = -$58,281.57

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