What would be Piscataway's net operating cash flow if they choose FPS?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
![Piscataway valves decided to pursue development of a new product line for natural
gas pipelines. The development effort has been successful and Piscataway is preparing
to begin manufacturing and marketing the new product line next year.
Piscataway has learned that marketing to natural gas pipeline companies requires commercial
skills and experience they do not have. Management has, as a consequence, decided
to have a partner and are in serious discussions with two companies having
the requisite marketing expertise: Fargo Pipeline Supplies (FPS) and Quantum International (QI)
Note: For this question, all cash flows are incremental cash flows.
Part A: FPS Proposal
FPS would provide only marketing, sales, and distribution for natural gas pipeline valves.
Piscataway would have to invest in faciliites to manufacture the valves, spending $7,465 in Year 0
Piscataway would have to invest in facilites to manufacture the valves, manufacture the valves themselves, and incur administrative expenses.
Total cash-out fllow for these are as shown below.
($s in 000s)
Year
Cash-In Flow (Payments from Customers)
Total Cash Outflow
2
$7,515
3
$12,515
$8,135
$5,045
12% of payments to customers to compensate them for marketing.
1
$3,700
$2,750
In addition, FPS would receive an annual fee of
These payments are not included in the Total Cash Flow above.
Piscataway's CFO has decided to use a required rate of return of
(i) What would be Piscataway's net operating cash flow if they choose FPS?
4
5
6
7
$18,375 $23,810 $25,305 $27,175
$11,025 $14,285 $14,920 $14,945
20% to evalaute the FPS proposal.
8
9
$37,825
$36,875
$20,280 $20,800
10
$37,900
$20,815](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7fa5fbc8-b7a6-472a-a4e2-348483b01488%2F50d3d6d1-a19c-4d01-949d-86bb6892039a%2F1b4nj8n_processed.png&w=3840&q=75)
Transcribed Image Text:Piscataway valves decided to pursue development of a new product line for natural
gas pipelines. The development effort has been successful and Piscataway is preparing
to begin manufacturing and marketing the new product line next year.
Piscataway has learned that marketing to natural gas pipeline companies requires commercial
skills and experience they do not have. Management has, as a consequence, decided
to have a partner and are in serious discussions with two companies having
the requisite marketing expertise: Fargo Pipeline Supplies (FPS) and Quantum International (QI)
Note: For this question, all cash flows are incremental cash flows.
Part A: FPS Proposal
FPS would provide only marketing, sales, and distribution for natural gas pipeline valves.
Piscataway would have to invest in faciliites to manufacture the valves, spending $7,465 in Year 0
Piscataway would have to invest in facilites to manufacture the valves, manufacture the valves themselves, and incur administrative expenses.
Total cash-out fllow for these are as shown below.
($s in 000s)
Year
Cash-In Flow (Payments from Customers)
Total Cash Outflow
2
$7,515
3
$12,515
$8,135
$5,045
12% of payments to customers to compensate them for marketing.
1
$3,700
$2,750
In addition, FPS would receive an annual fee of
These payments are not included in the Total Cash Flow above.
Piscataway's CFO has decided to use a required rate of return of
(i) What would be Piscataway's net operating cash flow if they choose FPS?
4
5
6
7
$18,375 $23,810 $25,305 $27,175
$11,025 $14,285 $14,920 $14,945
20% to evalaute the FPS proposal.
8
9
$37,825
$36,875
$20,280 $20,800
10
$37,900
$20,815
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