Question
PepsiCo would like to construct a new facility to increase the production of Starbucks ready-to-drink beverages. In additional to the capital expenditure on the plant,
PepsiCo would like to construct a new facility to increase the production of Starbucks ready-to-drink beverages. In additional to the capital expenditure on the plant, management estimates that the project will require an investment today of $1,200,000 for net working capital. The firm will recover the investment in net working capital eight years from today, when the management anticipates closing the plant. The discount rate for this type of investment is 6% per year.
1. What is the present value of the working capital?
2. Imagine that in period 2, the investment in net working capital increases to $1,800,000. Estimate the value of the working capital.
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