Problem 10.18 Healthy Potions, Inc., is considering investing in a new productio
ID: 2788014 • Letter: P
Question
Problem 10.18
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 $35,000, 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 13 years later. Assume the appropriate discount rate is 15.0 percent. What are the present values of the relevant investment cash flows? (Round answer to 2 decimal places, e.g. 15.25.)
Present Value: $________________
Problem 10.18
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 $35,000, 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 13 years later. Assume the appropriate discount rate is 15.0 percent. What are the present values of the relevant investment cash flows? (Round answer to 2 decimal places, e.g. 15.25.)
Present Value: $________________
Explanation / Answer
PVIF (15%, 13) = 0.162528
PV of incvestment cash flows = $52313.76
Calculation of present value of relevant investment cash flows: Year 1 Year 13 Cash Outflow Cash Inflow Net Cash outflow Cash Outflow Cash Inflow Net Cash inflow PV of net cash PV of investment Increase in Cash and Cash Equivalents 10000 -10000 10000 -10000 -1625.28 -11625.3 Increase in level of inventory 35000 35000 35000 35000 5688.48 40688.48 Increase in accounts receivable 25000 25000 25000 25000 4063.2 29063.2 Increase in accounts payable 5000 -5000 5000 -5000 -812.64 -5812.64 52313.76Related Questions
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