Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year. Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues. To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

Question

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Answer 1

Question

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

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Answer 2

Question

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

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Answer 3

Question

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

Expert Solution & Answer

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Answer 4

Question

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

Expert Solution & Answer

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Answer 5

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

Answer 6

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

Answer 7

Chapter 13, Problem 1MC

a)

Summary Introduction

Case summary:

Company S considering adding a new line to its product mix and the production line would be set up in unused space in the main plant. It has installed machinery which generates the incremental sales of $1,250 units per year.

Due to this the sale price and cost prices are increased by 3% and firm’s net working capital would have to rise by an amount equal to 12% of sales revenues.

To discuss: Incremental cash flow and Whether person X should subtract dividends or interest expenses while calculating project cash flows.

Answer 8

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

Answer 9

b)

Summary Introduction

To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

Answer 10

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

Answer 11

c)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

Answer 12

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

Answer 13

d)

Summary Introduction

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

Answer 14

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Answer 15

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Answer 16

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Answer 17

Ch. 13 - Define each of the following terms: Project cash...Ch. 13 - Prob. 2Q Ch. 13 - Why is it true, in general, that a failure to...Ch. 13 - Prob. 4Q Ch. 13 - Prob. 5Q Ch. 13 - Prob. 6Q Ch. 13 - Why are interest charges not deducted when a...Ch. 13 - Prob. 8Q Ch. 13 - Prob. 9Q Ch. 13 - Distinguish among beta (or market) risk,...

Solution Summary: The author explains that Incremental Cash flow is the cash flow of the business with the project minus the company's cash flows, and if it is a deferred (sunk) cost, it should not be

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To discuss: Whether an expenses of $100,000 cost to rehabilitate the production line will be included in the analysis or not.

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

To discuss: Whether plant space could be leased out to another firm at $25,000 per year will be included in the analysis or not.

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Chapter 13 Solutions