Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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The Adderley Corporation is considering investing in a new machine that has an estimated life of three years. The cost of the
machine (in 5 millions) is $500 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The
machine will result in sales of 300 million widgets in year 1 with future sales estimated to grow by 10% per year. The price per
widget that Adderley will charge its customers is $19 and is to remain constant over the three years. The widgets have a cost per
unit to manufacture of $7 each. Installing the machine and the resulting increase in manufacturing capacity will require an increase
in various net working capital accounts. It is estimated that the company will need to hold 3% of its annual revenues in cash, 4% of
its annual revenues in accounts receivable, 13% of its annual revenues in inventory, but will also benefit from trade financing (ie,
accounts payable) equal to 6% of its annual revenues. The firm is in the 28% tax bracket and has a cost of capital of 7%. What is the
required investment in net working capital (in $ millions, rounded to one decimal place, e.g. 12.3) in the second year of operations?
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Transcribed Image Text:The Adderley Corporation is considering investing in a new machine that has an estimated life of three years. The cost of the machine (in 5 millions) is $500 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The machine will result in sales of 300 million widgets in year 1 with future sales estimated to grow by 10% per year. The price per widget that Adderley will charge its customers is $19 and is to remain constant over the three years. The widgets have a cost per unit to manufacture of $7 each. Installing the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the company will need to hold 3% of its annual revenues in cash, 4% of its annual revenues in accounts receivable, 13% of its annual revenues in inventory, but will also benefit from trade financing (ie, accounts payable) equal to 6% of its annual revenues. The firm is in the 28% tax bracket and has a cost of capital of 7%. What is the required investment in net working capital (in $ millions, rounded to one decimal place, e.g. 12.3) in the second year of operations?
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