FINA-3313 Final

Jon Stevens, BNSF Vice President, and Controller describes the capital spending process primarily as

-A means to ensure regulatory compliance -A balancing act that requires careful evaluation of costs and benefits of each project

What types of analyses do the BNSF strategic studies team conduct?

-Discounted cash flow -Sensitivity

List steps of the capital budgeting process - Step 1 - Step 2 - Step 3 - Step 4 - Step 5

1. Proposal generation 2. Review and analysis 3. Decision Making 4. Implementation 5. Follow-up

What is the profitability index for Project A with a cost of capital of 8%? Year Project A Project B 0 (42,000) (45,000) 1 14,000 28,000 2 14,000 12,000 3 14,000 10,000 4 14,000 10,000 5 14,000 10,000

1.33

A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 38.75% of sales, while the fixed cost will be $450,000. The first year's sales estimates are $1,067,821. Calculate the firm's operating breakeven level of sales.

Operating breakeven level of sales = Fixed costs / ( 1 - Variable cost ratio ) = =450,000 / (1-38.75%) =734693.88

A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 40% of sales, while the fixed cost will be $441,559. The first year's sales estimates are $1,250,000. Calculate the firm's degree of operating leverage (DOL).

DOL = Sales-Variable cost/(Sales-variable cost-fixed cost) We are given the following details Sales = $ 1,250,000 Variable Cost = 40% of sales = 40%*$1,250,000 Variable cost =$500,000 Fixed cost = $ 441,559 Putting these values in the above formula DOL = Sales-Variable cost/(Sales-variable cost-fixed cost) DOL = (1,250,000 - 500,000 ) / ( 1,250,000 - 500,000 - 441,559) DOL = 2.43

Lipscomb Technologies' annual sales are $5,830,127 and all sales are made on credit, it purchases $3,587,171 of materials each year (and this is its cost of goods sold). Lipscomb also has $500,998 of inventory, $548,292 of accounts receivable, and $469,136 of accounts payable. Assume a 365 day year. What is Lipscomb's Operating Cycle (in days)?

Days in inventory=(Inventory/COGS)*365 =(500,998/3,587,171)*365 =50.9772938 days Days in AR=(AR/Sales)*365 =(548,292/5,830,127)*365 =34.3262814 days Operating cycle=Days in inventory+Days in AR =50.9772938 days+34.3262814 days= 85.30 days

What types of projects does the BNSF strategic studies team evaluate?

Discretionary

What is the internal rate of return for a project with an initial outlay of $10,000 that is expected to generate cash flows of $2,000 per year for 6 years?

FV= 0 PV= -10,000 PMT= 2,000 N= 6 Compute IRR= 5.47

NPV assumes intermediate cash flows are reinvested at the cost of equity, while IRR assumes that they are reinvested at the cost of capital

False

According to the article, "Sunk cost fallacy: Throwing good money after bad," how can banks limit losses from bad loans?

Increase bank executive turnover

_________ Results from the use of fixed-cost assets or funds to magnify returns to a firms owners

Leverage

In theory, a firm should maintain financial leverage consistent with a capital structure that

Maximize the owners wealth

Projects that compete with one another so that the acceptance of one eliminates from further consideration all other projects that serve a similar function

Mutually Exclusive

A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $78,173,236 now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project's NPV?

NPV= -78,173,236 - (20,000,000/(1 + 0.11)^1) + (80,000,000/(1 + 0.11)^2) + (90,000,000/(1 + 0.11)^3) NPV= 34,545,764.9

The " gold standard" of investment criteria refers to:

Net present value

Capital rationing may be beneficial to a firm if it

Weeds out proposals with weaker or biased NPVs

The primary purpose of capital budgeting is to

maximize shareholders wealth

What is the amount of the operating cash flow for a firm with $334,901 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate?

(334,901*0.65)+100,000= 317,685.65

Hammond Supplies expects sales of 236,304 units per year with carrying costs of $3.21 per unit and an ordering cost of $9.75 per order. Assuming the level of inventory is stable, what is the optimal average number of units in inventory?

1199

You are considering the following three mutually exclusive projects. The required rate of return for all three projects is 14%. Year A B C 0 $(1,000) $(5,000) $(50,000) 1 $300 $1,700 $0 2 $300 $1,700 $15,000 3 $600 $1,700 $33,000 4 $300 $1,700 $33,000 What is the IRR of the best project?

14.23%

Grill Master Johnnys are thinking about purchasing a new, energy-efficient grill. The grill will cost $53,000.00 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $11,750.00. The grill will have no effect on revenues but will save Johnny's $23,500.00 per year in energy expenses. The tax rate is 40%. The 3-year MACRS schedule; Year Depr % 1 33.33 2 44.45 3 14.81 4 7.41 What is the total cash flow in year 3?

25,860.64

Suppose the capital budget in the lecture example worksheet in $WIKI_REFERENCE$/pages/capital-budgeting-and-cash-flows-the-lectures?module_item_id=g9a89e790298905497957e6a4658e2a67 Video #11 was $100,000. What is the NPV of the best project(s)?

45,000

Match those following concepts for the first principle A. The investment decision - B. The financial decision - C. The dividend decision -

A. The investment decision - Invest in assets that earn a return greater than the minimum acceptable B. The financial decision -Find the right kind of debt for your firm and the right mix of debt and equity to fund your operations C. The dividend decision -If you cant find investments that make your minimum acceptable rate, return the cash to the owners of your business

The disadvantage of the IRR period method is that it

A. only words for normal cash flows B. requires complex calculations C. requires a lot of data (estimates of all CFs)

Carlisle Transport had $4,605 cash at the beginning of the period. During the period, the firm collected $1,622 in receivables, paid $2,006 to the supplier, had credit sales of $5,441, and incurred cash expenses of $500. What was the cash balance at the end of the period?

Cash+Receivables-suppliers-expenses =4,605+1622-2006-500 =3721

A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $100 million now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project's IRR? % terms to 2 decimal places and without the % sign.

Present value of inflows =cash inflow*Present value of discounting factor =80/1.11^2+90/1.11^3 =$130.737million Present value of outflows= $100+20/1.11 =$118.018million. Hence NPV= Present value of inflows-Present value of outflows =$130.737million-$118.018million =$12.72 million 100+20/1.0x=80/1.0x^2+90/1.0x^3 Hence x=IRR=15.945%

The degree of operating leverage has which of the following characteristics?

The DOL relates the change in sales to the change in net operating income

Which of the following statements is correct for a project with a negative NPV?

The cost of capital exceeds the IRR

Generally, increases in leverage result in ___________ return and ___________ risk

-Increased -Increased

Which of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project?

A decrease n the fixed costs

Davis Supply maintains an average inventory of 2,000 dinosaur skulls for sale to filmmakers. The carrying cost per skull per year is estimated to be $150.00 and the fixed order cost is $54. What is the economic order quantity (EOQ)?

Annual Requirement =2,000 Buying cost per order =54 Carrying cost per unit per annum =150 Economic order quantity =(2*Annual requirement*(Buying cost per order/Carrying cost per unit per annum))^(½) =(2*2000(54/150))^(0.5) = 37.95

A corporation is contemplating an expansion project. The CFO plans to calculate the project's NPV by discounting the relevant cash flows (which include the initial up-front costs, the operating cash flows, and the terminal cash flows) at the corporation's cost of capital (WACC). Which of the following factors should the CFO include when estimating the relevant cash flows?

Any opportunity cost associated with the project

Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $276 at the end of the next three years and then $1,533 per year for the three years after that. If the discount rate is 3.4% then what is the NPV?

CFo= -5,000 CO1= 276 FO1= 3 CO2= 1,533 FO2= 3 Enter NPV I= 3.4% Enter down arrow CPT NPV = 9667.18

Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $900 at the end of the next three years and then $1400 per year for the three years after that. If the discount rate is 8% then what is the PI?

CFo= -5,000 CO1= 900 FO1= 3 CO2= 1400 FO2= 3 NPV I= 8 enter down arrow Cpt NPV= 183.48 PI=(183.48+5,000)/5,000 PI= 1.03669 PI= 103.67%

Gilstrap Promotions has projected the following values for the next three months: January February March Sales $352,000 $379,000 $413,249 Purchases on trade credit $218,000 $240,000 $260,000 Cash expenses $88,000 $91,000 $94,000 Taxes, interest, and dividends $18,000 $20,000 $41,000 Capital Expenditures $50,000 0 $25,000 All sales are credit sales with 40% collected in the month of sale, 50% collected the following month, and the remainder collected in the second month after the sale. Credit purchases are paid in 30 days and all other items require immediate payment. Compute the net cash inflow for March.

Cash Receipts Cash Sales (40% March sales) ($413,249*40%) =$165,299.6 Credit sales (50% February sales) ($379,000*50%) =$189500 Credit sales (10% January sales) (352,000*10%) =$35200 Total cash receipts =$389,999.6 Cash payment Credit purchase (February purchase) =$240000 Cash expenses = $94000 Taxes, interest, and dividends =$41000 Capital Expenditure =$25000 Total Cash payment =$400,000 Net cash inflow for March =389,999.6-400,000 =-10,000.4

Compute the payback period for a project that requires an initial outlay of $153,425 that is expected to generate $40,000 per year for 9 years.

Cash outflow = $153,425 Cash inflow = $40,000 . At the end of 3 years the cash inflow will be 40,000*3= $120,000 Remaining amount 153,425 - 120,000= $33,425 Years = 33,425/40,000 = 0.84 Therefore payback period = 3 + 0.84 = 3.84 years.

Lipscomb Technologies' annual sales are $6,907,636 and all sales are made on credit, it purchases $3,235,864 of materials each year (and this is its cost of goods sold). Lipscomb also has $583,323 of inventory, $1,475,000 of accounts receivable, and $1,400,000 of accounts payable. Assume a 365 day year. What is Lipscomb's Receivables Period (in days)?

Receivables period=(Average AR/Sales)*365 =(1,475,000/6,907,636)* 365 = 77.94 days

Lipscomb Technologies' annual sales are $5,965,853 and all sales are made on credit, it purchases $3,030,231 of materials each year (and this is its cost of goods sold). Lipscomb also has $522,489 of inventory, $491,684 of accounts receivable, and $471,694 of accounts payable. Assume a 365 day year. What is Lipscomb's Receivables Turnover?

Receivables turnover ratio=Credit sales/receivables Where: Credit sales=$5,965,853 Receivables=$491,684 Receivables turnover ratio= $5,965,853/491,684 Receivables turnover ratio= 12.13 times

Which of the following statements is correct?

The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) those variable costs are a constant proportion of sales.

The Multiple IRR problem occurs when the signs of a project's cash flows change more than once

True

The internal rate of return (IRR) is the discount rate that equates the NPV of an investment opportunity with $0

True

The multiple IRR Problem occurs when the signs of a project cash flows change more than once

True

Identify which of these are the relevant cash flows when considering a capital budgeting project.

a. lost rent from a retail facility b. remodeling expenses for new store c. increase in inventory d. expected salvage value of manufacturing equipment

What are the advantages of the payback period?

a. measure liquidity, easy to communicate b. Does not require a discount rate c. Does not require complex calculations

What is the net effect on a firm's working capital if a new project requires: $33,143 increase in inventory, $43,659 increase in accounts receivable, $35,000.00 increase in machinery, and a $42,564 increase in accounts payable? Round to nearest dollar amount.

A/R= 43,659 Inventory=33,143 A/P= 42,564 (43,659+33,143)-42,564 34,238

Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles​ (who wants to ride on a cloudy day​ anyway?) The proposed project has the following​ features; ​• The firm just spent​ $300,000 for a marketing study to determine consumer demand​ (@ t=0). ​• Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 and owns it outright​ (that is, it does not have a​ mortgage). The land has a current market value of​ $2,600,000. ​• The project has an initial cost of​ $20,000,000 (excluding​ land, hint: the land is not subject to​ depreciation). ​• If the project is​ undertaken, at t​ = 0 the company will need to increase its inventories by​ $3,500,000, accounts receivable by​ $1,500,000, and its accounts payable by​ $2,000,000. This net operating working capital will be recovered at the end of the​ project's life​ (t =​ 10). ​• If the project is​ undertaken, the company will realize an additional​ $8,000,000 in sales over each of the next ten years.​ (i.e. sales in each year are​ $8,000,000) ​• The company's operating cost​ (not including​ depreciation) will equal​ 50% of sales. ​• The company's tax rate is 35 percent. ​• Use a​ 10-year straight-line depreciation schedule. ​• At t​ = 10, the project is expected to cease being economically viable and the factory​ (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase​ price). ​• The project's WACC​ = 10 percent ​• Assume the firm is profitable and able to use any tax credits​ (i.e. negative​ taxes). What is the total cash flow at​ t=10? Round to nearest whole dollar value.

10,712,500

Lipscomb Technologies' annual sales are $6,405,051 and all sales are made on credit, it purchases $3,396,479 of materials each year (and this is its cost of goods sold). Lipscomb also has $529,198 of inventory, $515,690 of accounts receivable, and beginning and ending of year $412,688 and $479,039 account payables (respectively). Assume a 365 day year. What is Lipscomb's Cash Cycle (in days)?

38.34

Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles​ (who wants to ride on a cloudy day​ anyway?) The proposed project has the following​ features; ​• The firm just spent​ $300,000 for a marketing study to determine consumer demand​ (@ t=0). ​• Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 and owns it outright​ (that is, it does not have a​ mortgage). The land has a current market value of​ $2,600,000. ​• The project has an initial cost of​ $22,482,497 (excluding​ land, hint: the land is not subject to​ depreciation). ​​• If the project is​ undertaken, the company will realize an additional​ $8,000,000 in sales over each of the next ten years.​ (i.e. sales in each year are​ $8,000,000) ​• The company's operating cost​ (not including​ depreciation) will equal​ 50% of sales. ​• The company's tax rate is 35 percent. ​• Use a​ 10-year straight-line depreciation schedule. ​• At t​ = 10, the project is expected to cease being economically viable and the factory​ (including land) will be sold for ​$4,500,000 (assume land has a book value equal to the original purchase​ price). ​• The project's WACC​ = 10 percent ​• Assume the firm is profitable and able to use any tax credits​ (i.e. negative​ taxes) .0 What is the​ project's outflow at​ t=0? Answer to the nearest whole dollar value.

25,082,497

Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles​ (who wants to ride on a cloudy day​ anyway?) The proposed project has the following​ features; ​• The firm just spent​ $300,000 for a marketing study to determine consumer demand​ (@ t=0). ​• Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 and owns it outright​ (that is, it does not have a​ mortgage). The land has a current market value of​ $2,600,000. ​• The project has an initial cost of​ $20,000,000 (excluding​ land, hint: the land is not subject to​ depreciation). ​• If the project is​ undertaken, at t​ = 0 the company will need to increase its inventories by​ $3,500,000, accounts receivable by​ $1,500,000, and its accounts payable by​ $2,000,000. This net operating working capital will be recovered at the end of the​ project's life​ (t =​ 10). ​• If the project is​ undertaken, the company will realize an additional​ $8,000,000 in sales over each of the next ten years.​ (i.e. sales in each year are​ $8,000,000) ​• The company's operating cost​ (not including​ depreciation) will equal​ 50% of sales. ​• The company's tax rate is 35 percent. ​• Use a​ 10-year straight-line depreciation schedule. ​• At t​ = 10, the project is expected to cease being economically viable and the factory​ (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase​ price). ​• The project's WACC​ = 10 percent ​• Assume the firm is profitable and able to use any tax credits​ (i.e. negative​ taxes). What is the operating cash flow​ @ t=1? Round to nearest whole dollar value.

3,212,500

Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles​ (who wants to ride on a cloudy day​ anyway?) The proposed project has the following​ features; ​• The firm just spent​ $300,000 for a marketing study to determine consumer demand​ (@ t=0). ​• Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 and owns it outright​ (that is, it does not have a​ mortgage). The land has a current market value of​ $2,600,000. ​• The project has an initial cost of​ $20,000,000 (excluding​ land, hint: the land is not subject to​ depreciation). ​• If the project is​ undertaken, at t​ = 0 the company will need to increase its inventories by​ $3,500,000, accounts receivable by​ $1,500,000, and its accounts payable by​ $2,000,000. This net operating working capital will be recovered at the end of the​ project's life​ (t =​ 10). ​• If the project is​ undertaken, the company will realize an additional​ $8,000,000 in sales over each of the next ten years.​ (i.e. sales in each year are​ $8,000,000) ​• The company's operating cost​ (not including​ depreciation) will equal​ 50% of sales. ​• The company's tax rate is 35 percent. ​• Use a​ 10-year straight-line depreciation schedule. ​• At t​ = 10, the project is expected to cease being economically viable and the factory​ (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase​ price). ​• The project's WACC​ = 10 percent ​• Assume the firm is profitable and able to use any tax credits​ (i.e. negative​ taxes). What is the operating cash flow​ @ t=2? Round to nearest whole dollar value.

3,212,500

Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles​ (who wants to ride on a cloudy day​ anyway?) The proposed project has the following​ features; ​• The firm just spent​ $300,000 for a marketing study to determine consumer demand​ (@ t=0). ​• Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 and owns it outright​ (that is, it does not have a​ mortgage). The land has a current market value of​ $2,600,000. ​• The project has an initial cost of​ $20,000,000 (excluding​ land, hint: the land is not subject to​ depreciation). ​• If the project is​ undertaken, at t​ = 0 the company will need to increase its inventories by​ $3,500,000, accounts receivable by​ $1,500,000, and its accounts payable by​ $2,000,000. This net operating working capital will be recovered at the end of the​ project's life​ (t =​ 10). ​• If the project is​ undertaken, the company will realize an additional​ $8,000,000 in sales over each of the next ten years.​ (i.e. sales in each year are​ $8,000,000) ​• The company's operating cost​ (not including​ depreciation) will equal​ 50% of sales. ​• The company's tax rate is 35 percent. ​• Use a​ 10-year straight-line depreciation schedule. ​• At t​ = 10, the project is expected to cease being economically viable and the factory​ (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase​ price). ​• The project's WACC​ = 10 percent ​• Assume the firm is profitable and able to use any tax credits​ (i.e. negative​ taxes). What are the after-tax proceeds from the sale of the factory​ (i.e., ATSV)? Round to nearest whole dollar value.

4,500,000

What is the equivalent annual cost for a project that requires a $50,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10%?

CF0=-50,000 CO1=-10,000 FO1=4 I=10% CPT NPV =-81,698.65 PV= -81,698.65 N=4 I=10 CPT PMT PMT=25,773.54

What is the NPV of a project that cost $100,000 and returns $50,000 annually for three years if the opportunity cost of capital is 7.37%

CFo = -100,000 CO1 = 50,000 FO1 = 3 I= 7.37 CPT NPV = $30,333.81

Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $501,046 and its variable costs equal 60% of sales. The company's interest expense is $500,000. What is the company's degree of total leverage (DTL)?

Degree of Total leverage = Contribution Margin/Earnings before tax = 3,000,000*(1-60%)/[(3,000,000*(1-60%)-501,046-500,000]= =6.03

Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $500,000 and its variable costs equal 60% of sales, so the company's current operating income is $700,000. The company's interest expense is $493,336. What is the company's degree of financial leverage (DFL)?

Degree of financial leverage = EBIT/EBT 700,000 / (700,000 - 493,336)= =3.39

It should not usually be clear whether we are describing independent or mutually exclusive projects in the following chapters because when we only describe one project then it can be assumed to be independent

False

Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles​ (who wants to ride on a cloudy day​ anyway?) The proposed project has the following​ features; ​• The firm just spent​ $300,000 for a marketing study to determine consumer demand​ (@ t=0). ​• Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 and owns it outright​ (that is, it does not have a​ mortgage). The land has a current market value of​ $2,547,220. ​• The project has an initial cost of​ $20,000,000 (excluding​ land, hint: the land is not subject to​ depreciation). ​• If the project is​ undertaken, at t​ = 0 the company will need to increase its inventories by​ $3,500,000, accounts receivable by​ $1,500,000, and its accounts payable by​ $2,000,000. This net operating working capital will be recovered at the end of the​ project's life​ (t =​ 10). ​• If the project is​ undertaken, the company will realize an additional​ $8,000,000 in sales over each of the next ten years.​ (i.e. sales in each year are​ $8,000,000) ​• The company's operating cost​ (not including​ depreciation) will equal​ 50% of sales. ​• The company's tax rate is 35 percent. ​• Use a​ 10-year straight-line depreciation schedule. ​• At t​ = 10, the project is expected to cease being economically viable and the factory​ (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase​ price). ​• The project's WACC​ = 10 percent ​• Assume the firm is profitable and able to use any tax credits​ (i.e. negative​ taxes). What is the​ project's NPV? Round to nearest whole dollar value.

Project=20,000,000 Land (market value)= 2,842,693 NOWC (from problem before)=3,000,000 CF0= Project+ Land+ NOWC= 25,842,693 2)CF0=-25,842,693 C01= 3,212,500 F01= 9 years C02= 10,712,500 F02= 1 I= 10% NPV= -3,211,696.50

Mavericks Cosmetics buys $4,100,531 of the product (net of discounts) on terms of 6/10, net 60, and it currently pays on the 10th day and takes discounts. Mavericks plans to expand, and this will require additional financing. If Mavericks decides to forego discounts, what would the effective percentage cost of its trade credit be, based on a 365-day year?

The firm pays on the 10th day. Effective cost of trade credit = [(1+(Discount rate/(1-Discount rate)))^(Total days/(Net days-Discount days)) -1] Effective cost of trade credit = [(1+(6%/(1-6%)))^(365/10) -1] Effective cost of trade credit = 856.83%

Net present value (NPV) is a sophisticated capital budgeting technique; found by adding a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital.

False

If a 20% reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis would suggest:

Deemphasizing that variable as a critical factor

Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $36,148 2 $40,000 3 $20,000 4 $10,000 Thereafter 0 Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $40,000 in plant and equipment that will be depreciated using the straight-line method over 5 years. The firm recently spent $2,000 on a study to estimate the revenues of the new product. The tax rate is 20%. What is the operating cash flow in year 1?

Depreciation= $40,000/5 = $8,000 Calculation of operating cash for year 1 OCF = Revenue-Cost-Depreciation × (1 - tax)+depreciation OCF = $36,148 - ($36,148 × 50%) - $8,000 × ( 1- 0.20) + $8,000 OCF = $10,074 × 0.80 + $8,000 = 16,059

Lipscomb Technologies' annual sales are $5,082,355 and all sales are made on credit, it purchases $4,313,408 of materials each year (and this is its cost of goods sold). Lipscomb also has $508,477 of inventory, $521,672 of accounts receivable, and $411,552 of accounts payable. Assume a 365 day year. What is Lipscomb's Inventory Period (in days)?

Inventory period = inventory/cost of goods sold *365 days Where Inventory=$508,477 Cost of goods sold=$4,313,408 Inventory period= $508,477/4,313,408*365 Inventory period= 43.03 days

Lipscomb Technologies' annual sales are $5,094,573 and all sales are made on credit, it purchases $3,143,365 of materials each year (and this is its cost of goods sold). Lipscomb also has $564,426 of inventory, $531,876 of accounts receivable, and $440,467 of accounts payable. Assume a 365 day year. What is Lipscomb's Inventory Turnover?

Inventory turnover = cost of goods sold /inventory Where: Cost of goods sold= $3,143,365 Inventory=$564,426 Inventory turnover = $3,143,365/564,426 =5.57 times

Mahrouq Technologies buys $16,115,771 of materials (net of discounts) on terms of 7/30, net 60, and it currently pays within 30 days and takes discounts. Mahrouq plans to expand, and this will require additional financing. If Mahrouq decides to forego discounts and thus to obtain additional credit from its suppliers, calculate the nominal cost of that credit.

Total period = 60 days Discount period = 30 days Discount = 7% Assume 365 days in a year Nominal cost of credit = [ Discount% / (1 - Discount%) ] * [ 365 / (Total period - Discount period)] = [ 0.07 / (1 - 0.07)] * [ 365 / (60 - 30)] = [ 0.07 / 0.93] * [ 365 / 30] = 0.0752688172 * 12.1666666666 Nominal cost of credit =91.57%