Question

Hi,

In this question, "current assets must increase by $5,000 and current liabilities will increase by $3,000.", but why $5,000 is shown as negative in the expert answer?

Thank you very much in advance!

2) Bart and Millhouse own a small factory that manufactures rubber snakes used to scare away birds from houses, gardens and playgrounds. A recent and unexplained increase in the bird population in Springfield has significantly increased the demand for rubber snakes. To take advantage of this opportunity, Bart and Millhouse plan to add a new molding machine that will double the output of their existing facility. The cost of the new machine is $20,000. With this purchase, current assets must increase by $5,000 and current liabilities will increase by $3,000. The economic life of the machine is 4 years, and it falls under the MACRS three year depreciation schedule. The machine is expected to be obsolete at the end of the fourth year and have no salvage value. Bart and Millhouse anticipate recouping 100% of the additional investment in net working capital at the end of year 4. Sales are expected to increase by $20,000 each year in year 1 and 2 and by $10,000 each year in year 3 and 4. The increase in operating expenses is estimated to be 20% of the annual change in sales. Assume that the marginal tax rate is 40%. Assume that the company's discount rate is 14%. Calculate the NPV of this project. Would you recommend that Bart and Millhouse add this machine to their factory? Expert Answer SNMAHE answered this 4,929 answers Was this answer helpful? B2 po Answer: NPV of this project = $7,300 Yes, I would recommend that Bart and Millhouse add this machine to their factory. NPV is positive. Workings are as below: Row o 2 ital Year 4 1 Cost of the new machine ($20,000) 2 Increase in current assets ($5,000) 3 Increase in current liabilities $3,000 4 Net Increase in working capital ($2,000) $2,000 5 Increase in sales $20,000 $20,000 $10,000 $10,000 6 Increase in operating expenses row 5 * -20%) ($4,000) ($4,000) ($2,000) ($2,000) 7 MACRS three year depreciation 33.33% 44.45% 14.81% 7.41% 8 Depreciation ( cost of machine * row 7) ($6,666) ($8,890) ($2,962) ($1,482) 9 Incremental Net savings (row 5+row 6 + row 8) $9,334 $7,110 $5,038 $6,518 10 Tax (40%) (row 9 * 40%) ($3,734) ($2,844) ($2,015) ($2,607) 11 Savings net of tax (row 9 + row10) $5,600 $4,266 $3,023 $3,911 12 Add back depreciation $6,666 $8,890 $2,962 $1,482 13 Cash flow (row 1 + row 4 +row 11 + row 12) ($22,000) $12,266 $13,156 $5,985 $7,393 14 PV factor (1/(1+14%)^year 1 0.87719 0.76947 0.67497 0.59208 15 Dicuntod och flour 12 14 d ni 760104201 SAA 277

Answer 1

Current Assets Increased means amount which to be collected is not collected Yet.

Thus Cash Inflow to be erceived is not received. Stopping of Cash Inflow will be considered as Cash Outflow.

Thus $ 5000 is considered as Cash Outflow and displayed with -ve sign and similar way $ 3000 is considred as Cash Inflow.

Pls comment, if any further assistance is required.