EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
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Chapter 8, Problem 7P
Castle View Games would like to invest in a division to develop software for video games. To evaluate this decision, the firm first attempts to project the working capital needs for this operation. Its chief financial officer has developed the following estimates (in millions of dollars):
Assuming that Castle View currently does not have any working capital invested in this division, calculate the cash flows associated with changes in working capital for the first five years of this investment.
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Gamestop wants to invest in a new division to develop software for video games. The company is
evaluating this decision by projecting the working capital needs for the operation. The CFO has developed
the following estimates (in millions of dollars). Assume that Gamestop does not currently have any working
capital invested in this division. Calculate the cash flows associated with the net working capital and
changes in net working capital for the first five years of this investment.
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Cash
6.
12
16
15
14
Accounts
21
26
24
25
24
Receivable
Inventory
Accounts
5
10
12
15
17
19
25
25
32
Payable
NWC
ANWC
Castle View Games would like to invest in a division to develop software for a soon-
to-be-released video game console. To evaluate this decision, the firm firstattempts to
project the working capital needs for this operation. Its chief financial officer has
developed the following estimates (in millions of dollars):
Year 1
Year 2
Year 3
Year 4
Year 5
Cash
6.
12
15
15
15
Accounts receivable
21
22
24
24
24
Inventory
Accounts payable
5
7
10
12
13
18
22
24
25
30
If Castle View currently does not have any initial working capital invested in this
division, calculate the cash flows associated with changes in working capital for the
first five years of this investment.
3.
A sports nutrition company is examining whether a new high-performance
sports drink should be added to its product line. A preliminary feasibility
analysis indicated that the company would need to invest $1 7.5 million in a
new manufacturing facility to produce and package the product. A financial
analysis using sales and cost data supplied by marketing and production personnel indicated that the net cash flow (cash inflows minus cash outflows)
would be $6.1 million in the first year of commercialization, $7.4 million in
year 2, $7 .0 million in year 3, and $ 5. 5 million in year 4.
Senior company executives were undecided whether to move forward
with the development of the new product. They requested that a discounted
cash flow analysis be performed using two different discount rates: 20 percent
and 15 percent.
a. Should the company proceed with development of the product if the
discount rate is 20 percent? Why?
b. Does the decision to proceed with development of the…
Chapter 8 Solutions
EBK CORPORATE FINANCE
Ch. 8.1 - How do we forecast unlevered net income?Ch. 8.1 - Prob. 2CCCh. 8.1 - Prob. 3CCCh. 8.2 - Prob. 1CCCh. 8.2 - What is the depreciation tax shield?Ch. 8.3 - Prob. 1CCCh. 8.3 - Prob. 2CCCh. 8.4 - Prob. 1CCCh. 8.4 - What is the continuation or terminal value of a...Ch. 8.5 - Prob. 1CC
Ch. 8.5 - How does scenario analysis differ from sensitivity...Ch. 8 - Pisa Pizza, a seller of frozen pizza is...Ch. 8 - Kokomochi is considering the launch of an...Ch. 8 - Home Builder Supply, a retailer in the home...Ch. 8 - Hyperion, Inc. currently sells its latest...Ch. 8 - Table 8.1 Spreadsheet HomeNets Incremental...Ch. 8 - Prob. 6PCh. 8 - Castle View Games would like to invest in a...Ch. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - Prob. 11PCh. 8 - A bicycle manufacturer currently produces 300,000...Ch. 8 - One year ago, your company purchased a machine...Ch. 8 - Prob. 15PCh. 8 - Markov Manufacturing recently spent 15 million to...Ch. 8 - Prob. 17PCh. 8 - Arnold Inc. is considering a proposal to...Ch. 8 - Bay Properties is considering starting a...Ch. 8 - Prob. 21PCh. 8 - Prob. 22P
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