Chapter 13 Question 9 **Working Capital and Capital Budgeting**Farbuck's Tea Shops is considering the opening of a new tea shop. The incremental cash flow (excluding the initial working capital investment) projected for the first five years is detailed as follows:- **Initial Capital Cost**: $3,500,000- **Operating Cash Flow for Each Year**: $1,000,000- **Recovery of Capital Assets After Five Years**: $270,000The hurdle rate for this project is set at 13%. If the initial cost of working capital is $510,000 (for items such as teapots, teacups, saucers, and napkins), should Farbuck's proceed with the project if it will only operate for five years? What is the maximum amount that can be invested in working capital while still ensuring a positive net present value (NPV)?**Should Farbuck's open this new shop if it will be in business for only five years? (Select the best response.)**- **A. No.** Farbuck's should not open the new shop because the project's NPV is **−$76,358**.- **B. Yes.** Farbuck's should open the new shop because the project's NPV is **$69,416**.- **C. No.** Farbuck's should not open the new shop because the project's NPV is **−$69,416**.- **D. Yes.** Farbuck's should open the new shop because the project's NPV is **$76,358**.

NPV is the present value of cash outflow - present value of cash inflow. given, Initial capital cost…

Working capital and capital budgeting. Farbuck's Tea Shops is thinking about opening another tea shop. The incremental cash flow (not including the working capital investment) for the first five years is as follows: Click on the icon e in order to copy its content into a spreadsheet Initial capital cost = $3,500,000 Operating cash flow for each year = $1,000,000 Recovery of capital assets after five years = $270,000 The hurdle rate for this project is 13%. If the initial cost of working capital is $510,000 for items such as teapots, teacups, saucers, and napkins, should Farbuck's open this new shop if it will be in business for only five years? What is the most it can invest in working capital and still have a positive net present value? Should Farbuck's open this new shop if it will be in business for only five years? (Select the best response.) O A. No. Farbuck's should not open the new shop because the project's NPV is - $76,358. O B. Yes. Farbuck's should open the new shop because the project's NPV is $69,416. OC. No. Farbuck's should not open the new shop because the project's NPV is - $69,416. O D. Yes. Farbuck's should open the new shop because the project's NPV is $76,358.

Working capital and capital budgeting. Farbuck's Tea Shops is thinking about opening another tea shop. The incremental cash flow (not including the working capital investment) for the first five years is as follows: Click on the icon e in order to copy its content into a spreadsheet Initial capital cost = $3,500,000 Operating cash flow for each year = $1,000,000 Recovery of capital assets after five years = $270,000 The hurdle rate for this project is 13%. If the initial cost of working capital is $510,000 for items such as teapots, teacups, saucers, and napkins, should Farbuck's open this new shop if it will be in business for only five years? What is the most it can invest in working capital and still have a positive net present value? Should Farbuck's open this new shop if it will be in business for only five years? (Select the best response.) O A. No. Farbuck's should not open the new shop because the project's NPV is - $76,358. O B. Yes. Farbuck's should open the new shop because the project's NPV is $69,416. OC. No. Farbuck's should not open the new shop because the project's NPV is - $69,416. O D. Yes. Farbuck's should open the new shop because the project's NPV is $76,358.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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