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CPA eBook Volume 5 -Finance Chapter 1 question

 
Picture of Dora Chan
CPA eBook Volume 5 -Finance Chapter 1 question
by Dora Chan Send a message - 4 Jun 2018, 10:43 PM
 


Example: Inflation

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.

Required

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.

Dora




Picture of TD Fernando
Re: CPA eBook Volume 5 -Finance Chapter 1 question
by TD Fernando Send a message - 13 Mar 2021, 6:07 PM
 

Sales/365 * 45 days = WC requirement 

This is the AR assuming that none of the customers pays till required to at the end of the 45 Days. 

630000/365 *45 = 77671 ( Per the question the sales are uniform across the period so this is valid)

We have already included a WC of $30K at the time of the initial investment. so the change in the WC that is needed to meet the new WC requirement based on the credit policy is

WC requirement - WC initial investment = 77671 - 30,000 = 47671