Johnson Enterprises is evaluating the development of a new product. The new product would generate...
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Johnson Enterprises is evaluating the development of a new product. The new product would generate sales of 1.2, 1.8, 2.4 and 3 million at the end of year 1, 2, 3 and 4, respectively. In addition, it would generate variable costs of 1.1, 1.2, 1.5 and 1.6 million at the end of year 1, 2, 3 and 4, respectively. The project requires an immediate (t=0) investment into R&D of 0.5 million that is not depreciated, and an investment into new equipment of 1 million that is depreciated using the straight-line method. The marginal tax rate is 40% and the effective weighted average cost of capital (WACC) is equal to 10%.
Question: Although the project above does not require an investment into net working capital, many projects do. How is net working capital defined? Why do you intuitively need to invest into net working capital? Do you recover your net working capital investment? When?
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