Principles of Accounting Volume 2
19th Edition
ISBN: 9781947172609
Author: OpenStax
Publisher: OpenStax College
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Hi there,
I am working on this problem and trying to figure out how to find the present value of net working capital. Can you please show me, without using excel, how to calculate it step-by-step?
firm has decided to replace a major piece of industrial equipment. The equipment costs $690,000 to
purchase and install and is expected to have a useful life of 5 years, after which it will be sold on the open
market and is expected to have a salvage value of $200,000. The firm has a cost of capital of 9.1%.
The new equipment will be one of a large group of assets with a CCA rate of 20%. The corporate tax rate is
40%. The company is responsible for maintenance and insurance costs of $40,000 per year. The new
equipment will allow the firm to increase production, and sales will increase by $270,000 per year.
The firm also anticipates that it will have to maintain its working capital requirements above its regular
levels as follows:
Year 0: $50,000; Year 1: $60,000; Year 2: $70,000; Year 3: $60,000; Year 4: $50,000. It is further
anticipated that at the end of the fifth year, working capital requirements will return to pre-project levels.
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