2. Finance
3. crockett is considering the purchase of an automated sewing machine...

# Question: crockett is considering the purchase of an automated sewing machine...

###### Question details

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.