A project requires additional accounts receivable of $1,000,000 and additional i

Question

A project requires additional accounts receivable of $1,000,000 and additional inventory of $500,000. It results in additional accounts payable of $800,000. Net working capital will return to its normal level following the 3-year project. What is the effect on the NPV of the project solely due to this investment in net working capital, assuming a 10% required rate of return?

A new piece of specialty equipment costs $2,500,000 and will be depreciated to an expected salvage value of $400,000 on a straight-line basis over its 3-year life. Assuming a tax rate of 35%, what is its after-tax salvage value if the equipment is actually sold after 2 years for $950,000?

A firm currently sells $2,250,000 annually of an expensive product line. That firm is considering a similar, less expensive, discount line, and projects sales of $420,000. The discount line is expected to reduce sales of the expensive product line to $2,000,000. What is the incremental revenue associated with the discount product line?

Project Z will result in unit sales of 2,250, at a price of $650 each. The variable cost (VC) of each unit is $325. The cost accountant will allocate overhead on the existing plant to Project Z at a rate of $21 per unit. A special piece of equipment must be leased for $75,000 per year for purposes related solely to Project Z. Project Z will reduce sales of the same company’s Project X by 900 units (selling price of $950 with variable cost of $510 and overhead allocation of $32 per unit). What is the total incremental cash flow for Project Z?

Explanation / Answer

1 PV of Net working capital invested at Year 0=(1000000-500000-800000) -700000 PV of Net working capital recovered in Year 3(700000/1.1^3) 525920 NPV of the project solely due to this investment in net working capital -174080 2 Equipment cost 2500000 Accumulated depn. At end of 2 yrs.(2500000-400000)/3yrs*2 yrs. 1400000 Carrying value at end of 2 yrs. 1100000 Sale value 950000 Loss on sale(1100000-950000) 150000 Tax saved due to loss(150000*35%) 52500 After-tax salvage=950000+52500= 1002500 3. Incremental revenue associated with the discount product line= Projected new sale value for this line-Sale value of expensive product cannibalised ie. 420000-(2250000-2000000) 170000 4 Cash flows for Project Z Sales-Variable costs----(650-325)*2250 731250 Leasing costs -75000 Net positive cash flows-----------------------1 656250 Reduced by: Project X's lost sales Sales-Variable costs----(950-510)*900----------2 396000 Incremental cash flow for Project Z----------(1-2) 260250

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