Johnson, Inc. is considering a new project. The project will require $350,000 fo
ID: 2752133 • Letter: J
Question
Johnson, Inc. is considering a new project. The project will require $350,000 for new fixed assets, $140,000 for additional inventory, and $45,000 for additional accounts receivable. Accounts Payable is expected to increase by $110,000 and long- term debt is expected to increase by $330,000. The project has a 7-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 30 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 $600,000 and costs of $400,000. The tax rate is 35 percent and the required rate of return is 12 percent.
D. What is the project’s cash flow at time zero?
a. -$195,000
b. -$350,000
c. -$425,000
d. -$490,000
e. -$535,000
Explanation / Answer
JOHNSON INC New Assets cost $ 350,000.00 Additional Inventory $ 140,000.00 Accounts Receivables $ 45,000.00 Accounts Payables $ 110,000.00 Long Term Debt $ 330,000.00 Expected life of Assets 7 Years Depreciation $ 50,000.00 ANS © working capital $ 75,000.00 New Assets Cost $ 350,000.00 Cash Flow at the time zero $ 425,000.00
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