Question

Veridian Dynamics is considering the purchase of a new cloning machine, which will cost $390 million plus an additional $10 million to ship and install. The new machine will replace the existing machine, which has zero book value and could be sold today for $40 million. The new machine will have a 4 year useful life and will be depreciated to zero using the straight line method. The machine will require $10 million worth of spare parts to be purchased initially and held in inventory for the next 4 years to make sure the machine operates smoothly. It is assumed that these spare parts will be sold at the end of 4 years and the entire $10 million will be recaptured.

The new machine will increase sales by $220 million per year, increase the cost of goods sold by $110 million per year, and decrease operating expenses by $10 million per year over the next 4 years. Veridian Dynamics expects to sell the new machine for $80 million at the end of 4 years. Veridian Dynamic's income tax rate is 35% and its cost of capital is 14%.

What is the inital investment in Net Working Capital? (Please show work by using a finance calculator)

A. $40 million

B. $20 million

C. $10 million

D. $390 million

Answer 1

Initial investment in Net Working Capital

Initial investment in Net Working Capital is the cost spare parts to be purchased initially and to be held in inventory for the next 4 years for the smooth and efficient operations of the machinery

Therefore, the Initial investment in Net Working Capital is the cost spare parts purchased for $10 Million

“Hence, the Initial investment in Net Working Capital would be (c). $10 Million”