Investment cash flows: Healthy Potions, Inc., is considering investing in a new
ID: 2680823 • Letter: I
Question
Investment cash flows: Healthy Potions, Inc., is considering investing in a new production line of 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 $51,786, increase accounts receivable by $25,000, and increase accounts payable by $5,000 at the beginning of the investment. Healthy Potions will recover these changes in working capital at the end of the project 11 years later. If the appropriate discount rate is 14.4 percent what is the net effect on the today's value of the project?(Round your answer to two decimal places. Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)
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Explanation / Answer
Investment cash flows: Healthy Potions, Inc., is considering investing in a new production line of 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 $51,786, increase accounts receivable by $25,000, and increase accounts payable by $5,000 at the beginning of the investment. Healthy Potions will recover these changes in working capital at the end of the project 11 years later. If the appropriate discount rate is 14.4 percent what is the net effect on the today's value of the project?
(Round your answer to two decimal places. Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)
The relevant cash flow related to working capital at the beginning of the project is:
=$(10,000)- $51,786 - $25,000 + $5,000 = -61, 786
The present value of relevant cash flow related to working capital at the end of the project is:
61, 786 /(1 + 14.4%)11 =49171.19
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