Question

in COSIS, dllu mo m Toqun dll dl livestment in net working capital of 650 000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project? 14. Project Evaluation IL art Evaluation ILO1] Your firm is contemplating the purchase of a new $425.000 computer-based order entry_system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at the end of that time. You will save $130,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $60,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this project? 1. Project Evaluation (LO2] In the previous problem, suppose your required return om $150.000 per year. Will

Hi,
Could you tell me why $60,000 of reduced in working capital is added in the year 0?

Thank you very much in advance!

Answer 1

As the incremental cash flows are identified every year, in year 0, the cash flows are investment in capex and working capital. As working capital is reduced by $ 60,000, this is identified with a net increase in cash flow to the tune of 60,000 as incremental cash flows are being considered. However, the same $ 60,000 when recovered at the end of the period is reduced from the cash flow. So the net effect is zero, other than the time value of money.