Heller is introducing a new product with sales of $10,000,000 per year and a Cost of Goods Sold (COGS) of $7,500,000 per year. They expect sale to grow at 5% per year for four years, then shrink at 30% per year for two years (7 years total), and then sales will stop. The 75% Cost of sales assumptions is expected to remain constant. The Heller Corporation has the following net operating working capital investment expectations for the beginning of each year of the project. At the end of the project the Net Operating Working Capital Investment will no longer be required.

Receivables: 46 days Next Year’s Sales

Inventory: 98 days COGS

Payables: 35 days COGS

Q1. Calculate the annual cash flow required for the resulting Net Operating Working Capital investment. I recommend you complete this analysis in Excel.

Q2. If the Opportunity Cost of Capital is 9% what is the impact of the required Net Operating Working Capital Investment on the NPV of the project?

Q3. How much value (measured by the impact on NPV) could they create by reducing the Inventory they hold to 60 days assuming that sales are unchanged.