Question: crockett is considering the purchase of an automated sewing machine...
Crockett is considering the purchase of an automated sewing machine that will cost $200,000 and is expected to operate for 5 years, after that it has no salvage value. The investment is expected to generate $360,000 revenues for each of the five year of the project’s life. Crockett is expecting to increase it’s accounts receivables by $60,000 and inventories by $36,000. this also will lead to an increase in accounts payable by $18,000.
This project will also result in cost of goods sold equal to 60%
of revenues while incurring other
operational expenses of $5,000 per year. In addition, the depreciation expense is one-fifth of the initial
investment. Income tax is 30% and the required rate of return is 20%.
Calculate the following:
The amount of cash needed to invest in working capital (Net working capital for year 0)
Operating cash flow
Comment on this project by calculating the NPV
Perform a sensitivity test assuming the expected revenues will decrease to $300,000 per year.
Perform a sensitivity test assuming the expected operational expenses will rise 50% for every year.