EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
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.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Royal Mount 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): (To copy the table below and use in Excel, click on icon in the upper right corner of table.) Year 1 Year 2 Year 3 Year 4 Year 5 1 Cash 5 12 14 16 14 2 Accounts receivable 18 22 23 21 25 3 Inventory 4 9 10 14 15 4 Accounts payable 17 22 24 27 31 Assuming that Royal Mount 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. (Enter increases as negative numbers since they are uses of cash.) The cash flow associated with the change in working capital for year 1 is $ integer.) million. (Round to the nearestarrow_forwardRoyal Mount 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): (To copy the table below and use in Excel, click on icon in the upper right corner of table.) 1 Cash 2 Accounts receivable 3 Inventory 4 Accounts payable Year 1 6 19 6 17 Year 2 11 23 8 22 Year 3 14 26 11 23 The cash flow associated with the change in working capital for year 1 is $ million. (Round to the nearest integer.) Year 4 5242 15 14 27 Year 5 16 24 14 ९ 34 Assuming that Royal Mount 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. (Enter increases as negative numbers since they are uses of cash.)arrow_forwardNakamichi Bancorp has made an investment in banking software at a cost of $1,430,438. Management expects productivity gains and cost savings over the next several years. If, as a result of this investment, the firm is expected to generate additional cash flows of $667,344, $725,331, $475,138, and $343,237 over the next four years, what is the investment’s payback period? (Round answer to 2 decimal places, e.g. 15.25.) Payback period is yearsarrow_forward
- Please give me answerarrow_forwardA firm is considering the installation of an automatic data processing unit to handlesome of its accounting operations. Machine for that purpose may be purchased for P2M or may be leased for P 800,000 for the first year and P 100,000 less every year until the end of the 4th year. If money is worth 15%, which alternative is better and by how much?arrow_forwardBlossom, Inc., is considering investing in a new production line for eye drops. Other than investing in the equipment, the company needs to increase its cash and cash equivalents by $11,000, increase the level of inventory by $31,000, increase accounts receivable by $26,000, and increase accounts payable by $6,000 at the beginning of the project. Blossom will recover these changes in working capital at the end of the project 6 years later. Assume the appropriate discount rate is 8 percent. What are the present values of the relevant investment cash flows? (Do not round intermediate calculations. Round answer to 2 decimal places, e.g. 5,275.25.) Present value $arrow_forward
- K Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.98 million. The product is expected to generate profits of $1.09 million per year for 10 years. The company will have to provide product support expected to cost $98,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year. a. What is the NPV of this investment if the cost of capital is 5.6%? Should the firm undertake the project? Repeat the analysis for discount rates of 1.6% and 14.5%, respectively. b. What is the IRR of this investment opportunity? c. What does the IRR rule indicate about this investment? a. What is the NPV of this investment if the cost of capital is 5.6%? Should the firm undertake the project? Repeat the analysis for discount rates of 1.6% and 14.5%, respectively. If the cost of capital is 5.6%, the NPV will be $ (Round to the nearest dollar.) Should the firm undertake the project? (Select the best choice…arrow_forwardGina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?arrow_forwardThe management of Kawneer North America is considering investing in a new facility and the following cash flows are expected to result from the investment: A. What is the payback period of this uneven cash flow? B. Does your answer change if year 10s cash inflow changes to $500,000?arrow_forward
- Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?arrow_forwardSentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $250,000 and will yield the following expected cash flows. Management requires a 10% return on investments. Period 1 Period 2 Period 3 Period 4 Period 5 Cash flow . $47,000 $52,000 $75,000 $94,000 $125,000 Required 1. Determine the payback period for this investment. (Round the answer to one decimal.) 2. Determine the break-even time for this investment. (Round the answer to one decimal.) 3. Determine the net present value for this investment. Analysis Component 4. Should management invest in this project?arrow_forwardOakmont Company has an opportunity to manufacture and sell a new product for a four-year period. After careful study, Oakmont estimated the following costs and revenues for the new product: When the project concludes in four years the working capital will be released for investment elsewhere within the company. Required: Using Excel (this will save you time and effort) answer the following: Oakmont’s cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV. Same situation as (a), but management does feel this project does possess a greater than average risk, so 19% should be the required rate of return. Compute the NPV. Management is concerned that Sales Revenues and Expenses could be rising due to inflationary factors. So the projection for year 1 is as shown, but that sales revenues will grow by 2% per year for years 2-4; and that variable expenses will grow by 4% per year for years 2-4, and that fixed out-of-pocket operating…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License