Question

Problem 10.18

Healthy Potions, Inc., is considering investing in a new production line for 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 $46,000, increase accounts receivable by $25,000, and increase accounts payable by $5,000 at the beginning of the project. Healthy Potions will recover these changes in working capital at the end of the project 9 years later. Assume the appropriate discount rate is 15.0 percent. What are the present values of the relevant investment cash flows? (Round answer to 2 decimal places, e.g. 15.25.)

Present value

$

Answer 1

Changes in working Capital = Increase in Cash & increase in incentery + increase in accounts receivable - increase in accounts payable - $ 10000+$46000+$ 25000-$5.000 = $ 76000 Increase in working capital mead cash outflow This amount of woc will be recovered at end of 9th year ie there will be inflow of $76000 at End of 9th year a present value of relevant cash inflows = $ 7600 1.159 0.2843 = 76000 0.2843 = $21,604 net present value = present value of inflows 7 $21,604 - $76000 possent halue of outfiaus = ($ 54396)