Financial Management: Theory & Practice
Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 11, Problem 3MC
Summary Introduction

Case summary:

Company S desires to add a new line to its product mix. For the purpose of this the analysis of capital budgeting are conducted by person X an MBA graduate. In order to set up this a machinery should be installed. For this installation company incurred certain additional expenses such as installation expenses and shipping charge etc. The machinery has a 4 years’ life with a salvage value of $25000.

The new line leads to increase sales. It results to an increase in company’s net working capital by 12% value of sales. Company’s tax rate is 25% and risk adjusted cost of capital and weighted average cost of capital for an average project is 10%.

To discuss: The reason why inflation significant in forecasting cash flows and calculate yearly sales revenues and costs.

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b. Disregard the assumptions in Part a. What is the depreciable basis? What are the annual depreciation expenses? c. Calculate the annual sales revenues and costs (other than depreciation). Why is it important to include inflation when estimating cash flows? d. Calculate annual net operating profit after sales (NOPAT). Then calculate the operating cash flows.
In terms of future value (FV) which of the following considerations is correct? Select one: O A. Consider only future cash flows as relevant factors O B. Consider only past cash flows as relevant factors O C. Consider past sales revenues and cost of sales as relevant factors O D. Consider future gross profit and net profits as relevant factors
What are: the payback method, the Accounting Rate of Return, and Discounted Cash Flow Model (Net Present Value and Internal Rate of Return)

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Financial Management: Theory & Practice

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