Corion Sales Ltd. is considering an investment in a new machine. The new machine will cost
$1,100,000. It qualifies for 20% declining balance CCA. Annual operating cash flows are expected to
be sales of $630,000 each year and annual operating costs of $275,000. The project is expected to
have a five-year life. At the end of Year 5, the machine can be sold for $150,000 (today’s dollars).
There will be an initial investment in receivables of $30,000 required. The company will have a credit
collection policy of 45 days on all sales, which will mean an increase in net working capital in Year 1.
Sales are expected to occur evenly throughout the year.
The company’s income tax rate is 25% and its discount rate for this project is 15%. Inflation is expected
to be 2% for the five-year period and to apply equally to all operating cash inflows and outflows, as
well as the salvage value.
Determine the cash flows for the project without adjusting for inflation.
My question;(sorry, I cannot copy the answer here, it doesn't work.)
I cannot figure out how to get the investment in working capital of (47,671). Anybody can help?
Thank you very much.