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Project Cash flow, Addition of product

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3 questions

1) All of the following are anticipated effects of a proposed project. Which of these should be included in the initial project cash flow related to net working capital?

a) an inventory decrease of $5000
b) an increase in accounts receivable of $1500
C)an increase in fixed assets of $7600
d) a decrease in accounts payable of $2100.

2) Joseph's & Co. purchase a corner lot in Eglon City five years ago at a cost of $640,000. The lot was recently appraised at $810,000. At the tiem of the purchase, the company spent $50,000 to grade the lot and another $4,000 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at $1.2 million. What amount should be used as the initial cash flow for this building project?

3) Walks Softly, Inc sells customized shoes. Currently, it sells 10, 000 pairs of shoes annually at an average price of $68 a pair. It is considering adding a lower-priced line of shoes which sell $49 a pair. Walks softly estimates it can sell 5,000 pairs of the lower-priced shoes but will sell 1,000 less pairs of the higher-priced shoes by dong so. What is the amount of the sales that should be used when evaluating the addition of the lower-priced shoes?

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Solution Preview

Please see attached file

1) All of the following are anticipated effects of a propose project. Which of these should be included in the initial project cash flow related to net working capital?

a) an inventory decrease of $5000
b) an increase in accounts receivable of $1500
C)an increase in fixed assets of $7600
d) a decrease in accounts payable of $2100.

Answer: All except C (an increase in fixed assets of $7600) should be included in the initial project cash flow
Inventory, accounts receivable and accounts payable are part of working ...

Solution Summary

Answers 3 questions on Initial project cash flow related to net working capital, Initial Cash flow for a building project and decision regarding addition of a lower priced line of shoes.

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Similar Posting

ALLIED FOOD PRODUCTS: Capital Budgeting and Cash Flow Estimation

ALLIED FOOD PRODUCTS: Capital Budgeting and Cash Flow Estimation

After seeing Snapple's success with non-cola soft drinks and learning of Coke's and Pepsi's interest, Allied Food Products has decided to consider an expansion of its own in the fruit juice business. The product being considered is fresh lemon juice.

Assume that you were recently hired as an assistant to the director of capital budgeting, and you must evaluate the new project. The lemon juice would be produced in an unused building adjacent to Allied's Fort Myers plant; Allied owns the building, which is fully depreciated. The required equipment would cost $200,000, plus an additional $40,000 for shipping and installation. In addition, inventories would rise by $25,000, while accounts payable would go up by $5,000.

All of these costs would be incurred at t _ 0. By a special ruling, the machinery could be depreciated under the MACRS system as 3-year property. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The project is expected to operate for 4 years, at which time it will be terminated. The cash inflows are assumed to begin 1 year after the project is undertaken, or at t _ 1, and to continue out to t _ 4. At the end of the project's life (t _ 4), the equipment is expected to have a salvage value of $25,000. Unit sales are expected to total 100,000 cans per year, and the expected sales price is $2.00 per can. Cash operating costs for the project (total operating costs less depreciation) are expected to total 60 percent of dollar sales. Allied's tax rate is 40 percent, and its weighted average cost of capital is 10 percent. Tentatively, the lemon juice project is assumed to be of equal risk to Allied's other assets.

Question 1:
Use the data to finish the partially completed table, attached. Also calculate the NPV, IRR, and payback.

Question 2:
Explain why this project should, or should not, be accepted.

Question 3:
Explain and illustrate with two examples: how one would apply scenario and sensitivity analyses to this decision.

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