Costly Working Capital for a Project
Emerald City Paints would like to construct a new facility that will manufacture paint. In addition to the capital expenditure on the plant, management estimates that the project will require an investment today of $450,000 for net working capital. The firm will recover the investment in net working capital eight years from today, when management anticipates closing the plant. The discount rate for this type of cash flow is 6% per year. What is the present value of the cost of working capital for the paint facility? What is the value of an inventory policy that would halve the plant’s net working capital requirements?
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