Harrington Inc. is introducing a new product in its line of household appliances. Household products generally have
Question:
Harrington Inc. is introducing a new product in its line of household appliances. Household products generally have 10-year life cycles and are viewed as capital budgeting projects over that period. Harrington’s working capital forecast for the project is as follows:
• $1.0 million will be invested in inventory before the project begins.
• Inventory will increase by $100,000 in each of the first six years.
• Accounts receivable will increase by $150,000 in each of the first four years and by $100,000 in each of the next two years.
• Accounts payable will increase by $110,000 in each of the first six years.
• During the last four years, the balance in each of these accounts will return to zero in four equal increments.
• Accruals are negligible.
Calculate the cash flows associated with working capital from the initial outlay to the end of the project’s life.
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