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 o 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 = $280,000 The hurdle rate for this project is 13%. If the initial cost of working capital is $520,000 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. Yes. Farbuck's should open the new shop because the project's NPV is $68,561. O B. Yes. Farbuck's should open the new shop because the project's NPV is $61,705. O C. No. Farbuck's should not open the new shop because the project's NPV is - $68,561. O D. No. Farbuck's should not open the new shop because the project's NPV is - $61,705.
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 o 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 = $280,000 The hurdle rate for this project is 13%. If the initial cost of working capital is $520,000 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. Yes. Farbuck's should open the new shop because the project's NPV is $68,561. O B. Yes. Farbuck's should open the new shop because the project's NPV is $61,705. O C. No. Farbuck's should not open the new shop because the project's NPV is - $68,561. O D. No. Farbuck's should not open the new shop because the project's NPV is - $61,705.
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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Chapter 13, Question 9. Attached is a similar question with answers. Please answer the same two parts for the new question
Transcribed Image Text:**Working capital and capital budgeting.** Farbuck's Tea Shops is considering opening another tea shop. The incremental cash flow (not including the working capital investment) for the first five years is as follows:
- **Initial capital cost** = $3,500,000
- **Operating cash flow for each year** = $1,000,000
- **Recovery of capital assets after five years** = $280,000
The hurdle rate for this project is 13%. If the initial cost of working capital is $520,000 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.)**
- **A.** Yes. Farbuck's should open the new shop because the project's NPV is $68,561.
- **B.** Yes. Farbuck's should open the new shop because the project's NPV is $61,705.
- **C.** No. Farbuck's should not open the new shop because the project's NPV is -$68,561.
- **D.** No. Farbuck's should not open the new shop because the project's NPV is -$61,705.
Transcribed Image Text:**Working Capital and Capital Budgeting**
Farbuck's Tea Shops is considering opening another tea shop. The incremental cash flow (excluding the working capital investment) for the first five years is as follows:
- **Initial Capital Cost:** $3,500,000
- **Operating Cash Flow for Each Year:** $1,000,000
- **Recovery of Capital Assets After Five Years:** $270,000
The hurdle rate for this project is 12%. Given that the initial working capital cost is $490,000 for items like teapots, teacups, saucers, and napkins, should Farbuck's open this new shop if it will be in business for only five years? Additionally, what is the most it can invest in working capital and still maintain a positive net present value (NPV)?
**Decision Options:**
- **A.** No. Farbuck's should not open the new shop because the project's NPV is -$41,419.
- **B.** Yes. Farbuck's should open the new shop because the project's NPV is $41,419.
- **C.** Yes. Farbuck's should open the new shop because the project's NPV is $46,021.
- **D.** No. Farbuck's should not open the new shop because the project's NPV is -$46,021.
**Maximum Investment in Working Capital for Positive NPV:**
- The maximum amount Farbuck's can invest in working capital and still have a positive NPV is **$596,388** (rounded to the nearest dollar).
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