Your personal banker added a clause in the contract. To be entitle for the loan, the business should yield a positive NPV. To set up the business, you will be required to purchase an equipment costing Rs 60,000.00. You expect inventory will increase by Rs 18,000.00 and accounts payable will increase by Rs5000.00. All the other working capital components will stay the same. So the change in net operating working capital is Rs 13,000.00 at t= 0. You expect to keep the company for 4 years and you expect to sell 20,000.00 units of peanut butter at a unit price of Rs35.00 and believe that both prices and quantity will remain the same. The fixed cost is Rs 7,000 every year and variable costs will be Rs1.03 per unit. You plan to use the straight- line depreciation and the equipment will be fully depreciated after 4 years. The salvage value is Rs24, 000 and tax rate is 23% 1. What are the incremental cash flows for the 4 years 2. If the WACC is 11%, will you get the loan?
Your personal banker added a clause in the contract. To be entitle for the loan, the business should yield a positive NPV. To set up the business, you will be required to purchase an equipment costing Rs 60,000.00. You expect inventory will increase by Rs 18,000.00 and accounts payable will increase by Rs5000.00. All the other working capital components will stay the same. So the change in net operating working capital is Rs 13,000.00 at t= 0. You expect to keep the company for 4 years and you expect to sell 20,000.00 units of peanut butter at a unit price of Rs35.00 and believe that both prices and quantity will remain the same. The fixed cost is Rs 7,000 every year and variable costs will be Rs1.03 per unit. You plan to use the straight- line depreciation and the equipment will be fully depreciated after 4 years. The salvage value is Rs24, 000 and tax rate is 23% 1. What are the incremental cash flows for the 4 years 2. If the WACC is 11%, will you get the loan?
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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Transcribed Image Text:Your personal banker added a clause in the contract. To be entitle for the loan, the business should
yield a positive NPV.
To set up the business, you will be required to purchase an equipment costing Rs 60,000.00. You
expect inventory will increase by Rs 18,000.00 and accounts payable will increase by Rs5000.00.
All the other working capital components will stay the same. So the change in net operating
working capital is Rs 13,000.00 at t=0.
You expect to keep the company for 4 years and you expect to sell 20,000.00 units of peanut butter
at a unit price of Rs35.00 and believe that both prices and quantity will remain the same. The fixed
cost is Rs 7,000 every year and variable costs will be Rs1.03 per unit. You plan to use the straight-
line depreciation and the equipment will be fully depreciated after 4 years. The salvage value is
Rs24, 000 and tax rate is 23%
1. What are the incremental cash flows for the 4 years
2. If the WACC is 11%, will you get the loan?
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