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What would be Piscataway's net operating cash flow if they choose FPS?

What would be Piscataway's net operating cash flow if they choose FPS?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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**Development of New Product Line for Natural Gas Pipelines** Piscataway Valves have decided to pursue the development of a new product line focusing on valves for natural gas pipelines. This follows a successful development effort, and the company is preparing to start manufacturing and marketing the new product line next year. To effectively market to natural gas pipeline companies, Piscataway has recognized the need for specific commercial skills and experience. Consequently, management has opted to partner with companies that have the necessary marketing expertise. They are currently in serious discussions with two potential partners: Fargo Pipeline Supplies (FPS) and Quantum International (QI). **Note:** All cash flows mentioned here are considered incremental. --- ### Part A: FPS Proposal FPS would be responsible for providing marketing, sales, and distribution services for the natural gas pipeline valves. Piscataway would need to invest in facilities to manufacture the valves. This initial investment requires a capital outlay of **$7,465,000 in Year 0**. The company will manage the manufacturing and cover associated administrative expenses. **Cash Flow Details (in $000s):** | Year | Cash-In Flow (Payments from Customers) | Total Cash Outflow | |------|----------------------------------------|---------------------| | 1 | $3,700 | $2,750 | | 2 | $7,515 | $5,045 | | 3 | $12,515 | $8,135 | | 4 | $18,375 | $11,025 | | 5 | $23,810 | $14,285 | | 6 | $25,305 | $14,920 | | 7 | $27,175 | $14,945 | | 8 | $36,875 | $20,280 | | 9 | $37,825 | $20,800 | | 10 | $37,900 | $20,815 | Additionally, FPS would receive an annual fee equivalent to **12%** of the payments received from customers for marketing efforts. These marketing fees are excluded from the cash flows listed above. To evaluate the FPS proposal, Piscataway's Chief Financial Officer has decided to use a required rate of return of **20%**. **Question:** (i) What would Piscataway's net operating cash flow be if they
Transcribed Image Text:**Development of New Product Line for Natural Gas Pipelines** Piscataway Valves have decided to pursue the development of a new product line focusing on valves for natural gas pipelines. This follows a successful development effort, and the company is preparing to start manufacturing and marketing the new product line next year. To effectively market to natural gas pipeline companies, Piscataway has recognized the need for specific commercial skills and experience. Consequently, management has opted to partner with companies that have the necessary marketing expertise. They are currently in serious discussions with two potential partners: Fargo Pipeline Supplies (FPS) and Quantum International (QI). **Note:** All cash flows mentioned here are considered incremental. --- ### Part A: FPS Proposal FPS would be responsible for providing marketing, sales, and distribution services for the natural gas pipeline valves. Piscataway would need to invest in facilities to manufacture the valves. This initial investment requires a capital outlay of **$7,465,000 in Year 0**. The company will manage the manufacturing and cover associated administrative expenses. **Cash Flow Details (in $000s):** | Year | Cash-In Flow (Payments from Customers) | Total Cash Outflow | |------|----------------------------------------|---------------------| | 1 | $3,700 | $2,750 | | 2 | $7,515 | $5,045 | | 3 | $12,515 | $8,135 | | 4 | $18,375 | $11,025 | | 5 | $23,810 | $14,285 | | 6 | $25,305 | $14,920 | | 7 | $27,175 | $14,945 | | 8 | $36,875 | $20,280 | | 9 | $37,825 | $20,800 | | 10 | $37,900 | $20,815 | Additionally, FPS would receive an annual fee equivalent to **12%** of the payments received from customers for marketing efforts. These marketing fees are excluded from the cash flows listed above. To evaluate the FPS proposal, Piscataway's Chief Financial Officer has decided to use a required rate of return of **20%**. **Question:** (i) What would Piscataway's net operating cash flow be if they
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