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Lawson. Inc. is expanding its manufacturing plant, which requires an investment of $4 million in new equipment and plant modifications. Lawson's sales are expected to increase by $3 million per year as a result of the expansion. Cash investment in current assets averages 30% of sales; accounts payable and other current liabilities are 10% of sales. What is the estimated total investment for this expansion?
The investment required includes increases in working capital (e.g.. additional receivables and inventories resulting from the acquisition of a new manufacturing plant). The additional working capital is an initial cost I of the investment, but one that will be recovered (i.e.. it has a salvage value equal to its initial cost). Lawson can use current liabilities to fund assets to the extent of 10% of sales. Thus, the total initial cash outlay will be $46 million ($4 million + [(30% --- 10%) x $3 million sales].