Healthy Potions, Inc., is considering investing in a new production line for eye

Question

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 $23,166, 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 14 years later. Assume the appropriate discount rate is 9.6 percent. What are the present values of the relevant investment cash flows? (Round answer to 2 decimal places, e.g. 15.25.)

Explanation / Answer

.cash and cash equivalents by $10,000, increase the level of inventory by $53,633, increase accounts receivable by $25,000, and increase accounts payable by $5,000 ..."

Change in Net Working Capital "NWC" required...
cash 10,000
+inventory: 53,633
+A/R: 25,000
- A/P: 5,000
= 83,633
FYI: "Uses" of cash:
L-
E-
A+
"Sources" of cash:
L+
E+
A-
where L = liabilities, E = equity, A = assets
where the arithmetic sign ( + or -) indicates an increase +, or decrease -, in the account type...so the increase in the Assets is a use of cash, and the increase in Liabilities (accounts payable) is a source of cash.

" Assume the appropriate discount rate is 8.3 percent. What are the present values of the relevant investment cash flows?"

at the beginning of the project: ($83,633) <this is a negative number, because it must be invested in order to do the project. e.g. a cash OUTflow
PV of 83,633 (recovered at end of year 8): 83,633/1.083^8 = $44,192.65<PV of the NWC recovered at the end of the project

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