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Louie's Leisure Products is considering a project which will require the purchase of $1,4 million in new equipment

Finance

Louie's Leisure Products is considering a project which will require the purchase of $1,4 million in new equipment. The equipment belongs in a 20% CCA class. Louie's expects to sell the equipment at the end of the project for 20% of its original cost. Annual sales from this project are estimated at $1.2 million Networking capital equal to 20% of sales will be required to support the project. All of the networking capital will be recouped at the end of the project. The firm desires a minimal 14% rate of return on this project. The tax rate is 34% What is the present value of the networking capital changes associated with the project? The project is expected to last 7 years. Multiple Choice $144 087

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Here is the calculation:

year 0 1 2 3 4 5 6 7
sales   1200000 1200000 1200000 1200000 1200000 1200000 1200000
Working capital 0 240000 240000 240000 240000 240000 240000 240000
Working capital change -240000             240000
Present value (PV) -240000             95913
NPV -144087              

Genrally, in NPV calculations, any working capital change required are taken in year 0 itself.

so, WC required in year 0 = WC in year 1 - WC in year 0 = -240,000

as per the question, this entire 24000 is recouped at the end of year 7.

So, NPV = -240,000 + PV of  240,000 to be received in year 7 = -240,000 + 240,000 / (1.14^7) = -144,087