Reviewing the cash-flow forecasts of a new investment project that appear in the following table, the Avon company's finance manager noted that there was no mention of any effect of the investment on the firm's accounts receivable and pay able. The average collection period on the new product was expected to be fifty days, and new raw material purchases were expected to be settled in thirty-six days on average. Also, he noted that the standard charges of 1 percent of sales revenues from new projects had not been made, nor the annual financing charge of 10 percent levied against the book value of the assets used by the project. How would the project's profitability be affected by including its effect on Avon's:

a. accounts receivable and accounts payable;

b. overhead costs; and

c. financial charges?

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(in thousands) Now Years 1 to 4 Year 5 1. Revenues 2. Raw materials cost 3. Direct costs 4. Depreciation expense 5. Pre-tax operating profit 6. Tax rate 7. After-tax operating profit 8. Incrcase in inventories 9. Capital expenditures 10. After-tax resale valuc of equipment 11. Cash flow from the project 12. Project net present value at 11% cost of capital $12,000 $12,000 4,000 1,000 4,000 3,000 40% 1,800 -400 4,000 1,000 4,000 3,000 40% 1,800 $ 400 20,000 0 -20,400 $ 1,274 5,800 6,200