Hollister & Hollister is considering a new project. The project will require $62

Question

Hollister & Hollister is considering a new project. The project will require $625,000 for new fixed assets, $218,000 for additional inventory, and $42,000 for additional accounts receivable. Short-term debt is expected to increase by $165,000. The project has a 6-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 20 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $875,000 with costs of $640,000. The tax rate is 34 percent and the required rate of return is 13 percent. What is the project's cash flow at time zero (Net cash outlay)?

-$720,000

-$779,000

-$944,000

-$638,000

-$536,000

©2015 McGraw-Hill Education. All rights reserved.

Requires a modern browser - e.g. Safari 1, Netscape 6 or IE 5

Explanation / Answer

Project Cash flow at time zero = Fixed capital investment + working capital investment
Fixed capital investment = -$625000 (-ve sign because it is casf outflow)
Working capital investment = non-cash change is asset - non-cash change in liabilities
= -1($218000 + $42000 - $165000)
= -$95000

Total cash flow = -$625000 - $95000
= -$720000

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.