GB 310

The cost of equity for a levered firm _______________.

None of these statements correctly complete the sentence.

What is the operating cash flow at year one? Round your answer to the nearest whole dollar. For example, $1,234.56 is 1235.

OCF = net income + depreciation 198,000 + 100,000 = 298,000

Scotty Scaffolding is evaluating a project that requires the purchase of some new equipment costing $459,000. The equipment is classified as 7-year property by the IRS. The IRS instructs you to depreciate the equipment as follows: Year: 1 2 3 4 5 6 7 8 Depreciation: 66,000 112,000 80,000 57,000 41,000 40,000 39,000 24,000 If net income for year 4 is projected to be $80,000, what is the projected Operating Cash Flow for year 4? Round your answer to the nearest whole dollar. For example, $1,234.56 is 1235.

OCF = net income + depreciation 80,000 + 57,000 = $137,000

What is the operating cash flows (OCF) for time 3? (Solve for W)

OCF = net income + depreciation, 66 + 8 = $74

If the appropriate discount rate is 15%, what is the net present value (NPV) for the proposed project? Round your answer to the nearest penny. For example, $12.3456 is 12.35.

NPV is 64.18, rounded

Spock Sprockets is analyzing a proposed project and has compiled the following information: Year 0 1 2 3 Cash flow from assets (CFFA) -$145,000 33,400 70,500 82,100 The required payback period is three years, and the required return is 9.50% per year. What is the net present value (NPV) of the proposed project? Round your answer to the penny. For example, $1,234.5678 is 1234.57.

NPV is 6831.84, rounded

Shemp owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies toSuzie's investments?

portfolio

Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities?

preferred stock

Leto Enterprises stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will occur in which one of the following markets?

primary

The items included in an indenture that limit certain actions of the issuer to protect bondholder's interests are _________________.

protective covenants

The risk-free rate of return is 4.6 percent and the market risk premium is 7.3 percent. What is the expected return for Fine Furniture if it has a beta of 1.29? Round your answer to the basis point.

rE = 4.6% + 1.29 (7.3% ) = 14.02% , rounded. Note, the market risk premium is given, not the expected return on the market.

The risk-free rate of return is 4 percent and the expected return on the market is 13.5 percent. What is the expected return of Larry Luggage if it has a beta of 1.16? Round your answer to the basis point.

rE =4%+1.16(13.5%−4%)=15.02%

The risk-free rate of return is 4.2 percent and the market rate of return is 8.5 percent. What is the expected return Howard Hauling if it has a beta of 1.4? Round your answer to the basis point.

rE =4.2%+1.4(8.5%−4.2%)=10.22%

Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?

risk premium

Which one of the following categories of securities had the highest average return since 1925?

small company stocks

The principle of diversification tells us that ___________________.

spreading an investment across many diverse assets will eliminate some of the total risk

Nondiversifiable risk is also known as _______________.

systematic risk

Market risk is measured by ________________.

the beta coefficient

Which one of the following statements is correct?

the greater the volatility of returns, the greater the risk premium

An indenture is __________________

the legal agreement between the bond issuer and the bondholders

If Moe Merchandise's expected return plots above the security market line, the asset is _________.

underpriced

Which one of the following risks is irrelevant to a well-diversified investor?

unsystematic risk

You cannot attend the shareholder's meeting for Idaho United, so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

voting by proxy

The optimal capital structure ______________.

will vary over time as taxes and market conditions change

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. Which one of the following is the name for the 11.6 percent?

yield to maturity

Arrakis Dinner Theatres has paid annual dividends of $0.32, $0.52, and $0.60 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off, and sales are expected to remain relatively flat. Given the lack of future growth, you will only buy this stock if you can earn at least a 19 percent rate of return. What is the maximum amount you are willing to pay for one share of this stock today? Round your answer to the penny.

$0.60/.19 = $3.15789474 , or $3.16 rounded

Alia Hardware paid an annual dividend of $0.95 per share last month. Today, the company announced that future dividends will increase by 2.6 percent annually. If you require a 13 percent rate of return, how much are you willing to pay to purchase one share of this stock today? Round your answer to the penny.

$0.95x(1+.026)/ .13 − .026 = $9.37211538 , or $9.37 rounded

The common stock of Mentat Mills pays an annual dividend of $1.65 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 12 percent annual return? Round your answer to the penny.

$1.65/.12 = $13.75

Duncan Manufacturers made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.75 a share. Secondly, all dividends after that will decrease by 1.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock today if you require a 14 percent rate of return? Round your answer to the penny.

$1.75/.14 − (−0.015) = $11.29032258 , or $11.29 rounded

Gesserit Gas recently paid a $2.80 annual dividend on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate of return? Round your answer to the basis point.

$26.91 = .80x(1+.38)/r − .038 -> r = .14600446 , or 14.60% rounded

The common stock of Dune Deliveries sells for $28.16 a share. The stock is expected to pay its annual dividend of $1.35 per share next year. The firm has established a pattern of increasing its dividends by 3 percent annually and expects to continue doing so. What is the market rate of return on this stock? Round your answer to the basis point.

$28.16=$1.35/ r-.03 = .0779034 , or 7.79% rounded

Fremen Gardens pays an annual dividend that is expected to increase by 3.6 percent per year. The stock commands a market rate of return of 12.6 percent and sells for $28.50 a share. What is the expected amount of the next dividend? Round your answer to the penny.

$28.50=D (underscore 1)/.126-.036 -> D1 = 2.565 , or $2.57 rounded

Landsraad Welding Supplies common stock sells for $38 a share and pays an annual dividend that increases by 3 percent annually. The market rate of return on this stock is 8.20 percent. What is the amount of the last dividend paid? Round your answer to the penny.

$38 =D(underscore 0)x (1+.03)/.082-.03 = 1.91844660 , or $1.92 rounded

Baron Canning Products common stock sells for $41.00 a share and has a market rate of return of 12.8 percent. The company just paid an annual dividend of $1.15 per share. What is the dividend growth rate? Round your answer to the basis point.

$41 = $1.15x(1+ g)/.128-g -> g = 0.0972242 , or 9.72% rounded

A stock pays a constant annual dividend and sells for $56.10 a share. If the market rate of return on this stock is 12.2 percent, what is the amount of the next annual dividend? Round your answer to the penny.

$56.10 = D1/.122 -> D1 = 6.8442 , or $6.84 rounded

Which of the following statements about the model presented in this module are false? Select 'All are true' if you believe all of the other choices are correct.

-The model is not related to the four fundamental accounting statements. -The model uses finance, but only in the numerators.

When using a firm's existing WACC to evaluate a potential project, which of the following statement are true?

-The riskiness of the project's cash flows should be similar to those of the existing firm. -The project should be financed in a similar fashion as the existing firm. -If the existing firm is unlevered, then after-tax cost of equity is the appropriate discount rate for the project.

Which of the following statements are true?

-The volatility in the numerators of the NPV equation influence the denominators. -As the firm levers up, the stock's beta will increase. -Different assets have different business risks. -For the levered firm, financial risk influences the after-tax cost of equity and debt

Which of the following are costs associated with approaching bankruptcy but not entering it?

-managerial distraction -changing supplier terms -foregone sales -lost talent

A firm should select the capital structure that ______________.

-maximizes the value of the firm -equates the marginal benefits of debt to the marginal costs

The after-tax cost of debt _______________.

-reflects the government subsidizing the use of debt over equity -has a greater effect on a firm's WACC when the debt-to-equity ratio increases

The average of a firm's cost of equity and after-tax cost of debt that is weighted based on the firm's capital structure is called the ____________________.

-return on assets -weighted average cost of capital

Which of the following does the weighted average cost of capital account for?

-the opportunity costs of the capital providers -default risk -taxes -business risk -the fraction of money coming from each source of financing

Gurney Company had earnings per share of $3 over the past year. The industry average PE ratio is 14.5. Given this information, what is the approximate value per share of Callahan's stock? Round your answer to the penny.

14.5x$3=$43.50

The common stock of Curly Catering has an expected return of 14.7 percent. The return on the market is 10.8 percent and the risk-free rate of return is 3.8 percent. What is the beta of this stock? Round your answer to two decimal places.

14.7% = 3.8% + B E (10.8% − 3.8% ) -> B E = 1.56 , rounded.

Which one of the following bonds is the least sensitive to interest rate risk?

3-year

Which of the following costs are NOT incurred by firms that enter bankruptcy?

All of these choices are costs associated with entering bankruptcy.

Which one of the following will have little, if any, effect on a well-diversified portfolio?

An explosion at a distribution warehouse.

What is the cash flows from assets (CFFA) for time 3? (Solve for Z)

CFFA = OCF - change NWC - NCS At time 3: CFFA = 74 - 5 - 0 = $69. This is a $69 inflow.

A project under consideration by McCoy Pharmaceuticals requires an initial investment in inventory of $430,000 and increasing its accounts payable to suppliers by 70 percent of that amount. The project also requires an initial investment of $500,000 to expand the warehouse space used to hold the 7 inventory. For the project analysis, what amount should McCoy use as the initial cash flow from assets (CFFA)? Round your answer to the nearest whole dollar and indicate whether it is an inflow or outflow. For example, -$1,234.56 is 1235 outflow.

CFFA = OCF - change NWC - NCSAt time 0: CFFA = 0 - 129,000 - 500,000 = -$629,000. This is a $629,000 outflow.

An increase in which of the following will increase the current value of a stock according to the dividend growth model? I. dividend amount II. number of future dividends, provided the current number is less than infinite III. discount rate IV. dividend growth rate

I, II, and IV

Yoda Yoyos stock has a beta of .90. If Yoda levers up the beta will increase to 1.2. Treasury bills currently yield 3.5% annually and the expected return on the market is 11.8% per year. Under the CAPM, how much compensation will Yoda's stockholders receive for this additional financial risk? Present your answer in basis points.

Dark Siding plans to restructure its firm so that it has no debt. If it does so, its stock beta will fall from 1.6 to 1.1. If the riskless rate is 5% and the expected market risk premium 8.2%, then how much compensation do the owners of Dark Siding get for business risk? Round your answer to the basis point.

Stooges Stock has a beta of 1.03. What effect will an increase in the risk-free rate of return have on the expected return for Stooges A?

Decrease the expected return

Consider the following information Jabba Jelly: value of equity = $18 billion value of debt = $6 billion cost of equity = 27.4% yield-to-maturity on outstanding bonds = 8.8% tax rate = 37% Projected Cash Flows (in millions): Years 012345 CFFA -1201822283338 Under NPV and IRR, is the project a winner or loser for Jabba?

E=$323, D=$103, soV=323+103=$426 D E 103 323 .31888545wE 323426.75821596wD 103426.24178404

Which one of the following statements is true regarding the beta coefficient?

Generally speaking, the higher the beta the higher the expected return.

Which of the following relationships apply to a par value bond? I. coupon rate = yield-to-maturity II. coupon rate > yield-to-maturity III. market price = annual coupon IV. market price = face value

I and IV

Which of the following questions does the capital budgeting process address? I. What products or services will we offer or sell? II. In what markets will we compete? III. What new products will we introduce?

I, II, and III

Which of the following statements related to financial risk are correct? I. Financial risk is the risk associated with the use of debt financing. II. As financial risk increases so too does the cost of equity. III. Financial risk decreases as the firm levers down. IV. Financial risk is the risk that is inherent in a firm's operations.

I, II, and III only

Which of the following defines a note? I. maturity of a year or less II. maturity more than a year III. maturity less than ten years IV. maturity more than ten years

II and III

The after-tax cost of debt generally increases when: I. the firm's default risk decreases II. the yield-to-maturity increases III. tax rates decrease IV. bond prices rise

II and III only

Which of the following have been eliminated from a well-diversified portfolio? I. market risk II. asset-specific risk III. unsystematic risk IV. systematic risk

II and III only

Which of the following pairs of terms are synonymous? I. systematic risk and unique risk II. market risk and systematic risk III. unsystematic risk and asset-specific risk

II and III only

A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond? I. discounted price II. premium price III. yield-to-maturity that exceeds the coupon rate IV. yield-to-maturity that is less than the coupon rate

II and IV

Spock Sprockets is analyzing a proposed project and has compiled the following information: Year 0 1 2 3 Cash flow from assets (CFFA) -$145,000 33,400 70,500 82,100 The required payback period is three years, and the required return is 9.50% per year. What is the internal rate of return (IRR) for the project? Round your answer to basis point in percentage form. For example, 12.3456% is 12.35.

IRR is 11.81, rounded

What is the internal rate of return for the proposed project? Round your answer to the nearest basis point in percentage form. For example, 12.3456% is 12.35.

IRR is 21.92, rounded

Which one of the following is an example of systematic risk?

Investors panic causing security prices around the globe to fall precipitously.

Spock Sprockets is analyzing a proposed project and has compiled the following information: Year 0 1 2 3 Cash flow from assets (CFFA) -$145,000 33,400 70,500 82,100 The required payback period is three years, and the required return is 9.50% per year. What is the payback period for the proposed project? Round your answer to two decimal places. For example, 1.2345 years is 1.23.

Payback is 2.50 years

What is the payback period for the proposed project? Round answer to two decimal places. For example, 1.2345 years is 1.23.

Payback is 4.08 years

Which of the following methods of project analysis is most biased towards short-term returns?

Payback period

Vader Vitamins levered up, increasing its debt-to-equity ratio from 1.17 to 1.24. What impact with this have on Vader's capital structure weights?

Skywalker Socks wants to reduce its use of leverage. If it cuts it D/E ratio from .40 to .30, what will happen to Skywalker's capital structure weights?

Which one of the following securities had the most volatile returns for the period since 1925?

Small-company stocks

Since 1925, which one of the following statements is correct?

The frequency distribution of the returns on large-company stocks is wider than the frequency distribution of the returns on long-term corporate bonds.

Which one of the following is an example of erosion?

The loss of sit-down restaurant sales when the restaurant begins to offer take-out service.

Chekov's Lunch Counter is expanding and expects operating cash flows of $29,000 a year for four years as a result. This expansion requires an initial investment of $39,000 in new fixed assets. These assets will be worthless at the end of the project and have a book value of $2,000. Also, the project requires $3,000 of net working capital throughout the life of the project. That's the same level of net working capital for each year of the project. He faces a tax rate of 35%. If Chekov requires 15% per year on his investment and has a 3-year payback rule, will he accept or reject the project under NPV, IRR, and Payback? Why?

Start by calculating the after-tax salvage value.ATSV = salvage value - tax rate × (salvage value - book value) ATSV = 0 - .35 × (0 - 2,000) = $700This is a tax refund because the asset was under-depreciated. Fill in the table:Year: 01234 OCF:-Change NWC: -3,000 29,000 29,000 29,000 29,000 29,000 29,000 - (-3,000) 700 32,700 NPV Rule: Accept the project because it is expected to create $42,910 of value. IRR Rule: Accept the project. Its rate of return is 59.08%, which is higher than the 15% Bruno's next best similar asset pays. Payback Rule: Accept the project because it pays back in just 1.45 years, which is less than Bruno's 3- year cutoff date. It appears that Bruno has a heck of winner on his hands. That is of course if he can go out turn those projected cash flows into actual cash flows, which typically is really hard.

Should Uhura accept the project under the NPV, IRR, and Payback rules? Assume Uhura requires a three-year payback period.

The NPV and IRR rules would accept the project, while the Payback rule rejects it.

Spock Sprockets is analyzing a proposed project and has compiled the following information: Year 0 1 2 3 Cash flow from assets (CFFA) -$145,000 33,400 70,500 82,100 The required payback period is three years, and the required return is 9.50% per year. Based on which capital budgeting decision rules should Spock accept the project? NPV rule, IRR rule, or Payback rule?

The NPV, IRR, and Payback rules would accept the project. It's a trifecta.

Halleck Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. It will issue the bonds at par and repay them in ten years. Given this, which one of the following statements is correct?

The bonds will sell at a premium if the market rate declines to 5.5 percent.

Which of the following best describes the concept of erosion?

The cash flows of a new project that come at the expense of a firm's existing cash flows.

Chani Industries has bonds on the market making annual payments, with 14 years to maturity, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. If the bond has a face value of $1,000, what is the coupon rate? Round your answer to the basis point.

The coupon rate = $119.999774/$1,000 = .119999774, or 12.00% rounded to the basis point.

Scotty Scaffolding is evaluating a project that requires the purchase of some new equipment costing $459,000. The equipment is classified as 7-year property by the IRS. The IRS instructs you to depreciate the equipment as follows: Year: 1 2 3 4 5 6 7 8 Depreciation: 66,000 112,000 80,000 57,000 41,000 40,000 39,000 24,000 If Scotty sells the equipment at the end of year 4 for $327,000, what is the projected Net Capital Spending for year 4? The appropriate tax rate is 35 percent. Round your answer to the nearest whole dollar. For example, $1,234.56 is 1235.

The net capital spending at time 4 is the after-tax salvage value. ATSV = salvage value - tax rate × (salvage value - book value) ATSV = 327,000 - .35 × (327,000 - 144,000) = $262,950

Which one of the following statements is an example of unsystematic risk?

The number of vehicles sold by a major manufacturer was less than anticipated.

Yueh Adventure Properties offers a 9.5 percent coupon bond with annual payments. The yield to maturity is 11.2 percent, and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000? Round your answer to the penny.

The price of the bond is $895.43, rounded to the penny.

Corrino Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent. The bonds mature in 6 years. What is the market price per bond if the face value is $1,000? Round your answer to the penny.

The price of the bond is $991.47, rounded to the penny.

Which one of the following statements is correct?

The risk premium a security should earn depends on the security's beta.

Which one of the following statements is correct?

The risk-free rate of return is the reward for waiting for your money assuming there is no risk in doing so.

Harkonnen Industrial Products' bonds have a 7.60 percent coupon and pay interest annually. The face value is $1,000, and the current market price is $1,062.50 per bond. The bonds mature in 16 years. What is the yield to maturity? Round your answer to the basis point.

The yield on the bond is 6.94%, rounded to the basis point.

On the pro forma income statement, what is the net income for this project in the first year? Round your answer to the nearest whole dollar. For example, $1,234.56 is 1235.

Total Sales 35,000 units × $40/unit = 1,400,000minus Variable costs 35,000 units × $25/unit = 875,000 minus Fixed costs = 125,000minus Depreciation = 100,000equals taxable income (EBIT) of $300,000 Income tax to be paid equals 34% of $300,000, or .34 × $300,000 = $102,000 Net Income = EBIT - tax = $300,000 - $102,000 = $198,000

Which one of the following investments was the least risky over the period since 1925?

U.S. Treasury bills

Which one of the following statements is true regarding risk premiums?

U.S. Treasury bills have no risk premium.

Scotty Scaffolding is evaluating a project that requires the purchase of some new equipment costing $459,000. The equipment is classified as 7-year property by the IRS. The IRS instructs you to depreciate the equipment as follows: Year: 1 2 3 4 5 6 7 8 Depreciation: 66,000 112,000 80,000 57,000 41,000 40,000 39,000 24,000 What is the balance in accumulated depreciation on the pro forma balance sheet at the end of year 4? Round your answer to the nearest whole dollar. For example, $1,234.56 is 1235.

accumulated depreciation = 66,000 + 112,000 + 80,000 + 57,000 = $315,000

Sulu Solar just purchased some a truck for $106,000. Trucks are classified as 3-year property by the IRS. See the required depreciation schedule below. If Sulu expects to sell the truck for $30,000 after three years and they face a 35% tax rate, what it is the expected after-tax salvage value? Round your answer to the nearest whole dollar. For example, $1,234.56 is 1235. Year: 1 2 3 4 Depreciation: 35,000 47,000 16,000 8,000

accumulated depreciation after 3 years = 35,000 + 47,000 + 16,000 = $98,000 book value = purchase price - accumulated depreciation 106,000 - 98,000 = $8,000ATSV = salvage value - tax rate × (salvage value - book value) ATSV = 30,000 - .35 × (30,000 - 8,000) = $22,300

Pro forma financial statements _________________.

are used by internal information users & are projected future financial statements associated with a potential project

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?

beta

Scotty Scaffolding is evaluating a project that requires the purchase of some new equipment costing $459,000. The equipment is classified as 7-year property by the IRS. The IRS instructs you to depreciate the equipment as follows: Year: 1 2 3 4 5 6 7 8 Depreciation: 66,000 112,000 80,000 57,000 41,000 40,000 39,000 24,000 What is the book value of the asset on the pro forma balance sheet at the end of year 4? Round your answer to the nearest whole dollar. For example, $1,234.56 is 1235.

book value = purchase price - accumulated depreciation 459,000 - 315,000 = $144,000

Which one of the following risks is related to the volatility of the cash flows generated by the daily operations of a firm?

business risk

What is the change in net working capital for time 3? (Solve for X)

change in net working capital = ending NWC - beginning NWC 215 - 210 = 5

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?

common

Paul just purchased a bond which pays $60 a year in interest. What is this $60 called?

coupon

The Atreides Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

debenture

A firm's cost of capital _______________________.

depends upon how the funds raised are going to be spent.

Increasing which one of the following will increase the operating cash flow at a point of time?

depreciation expense

What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

dividend growth

What are the distributions to shareholders by a corporation called?

dividends

Municipal bonds __________________

pay interest that is federally tax-free

The static theory of capital structure advocates that the optimal capital structure for a firm _______.

equates the tax savings from an additional dollar of debt to the increased financial distress costs related to that additional dollar of debt.

The internal rate of return (IRR) decision rule states that a project should be accepted whenever the IRR _____________

exceeds the required return

A bond's coupon rate is equal to the annual interest divided by which one of the following?

face value

Jessica owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?

face value

Which one of the following risks is related to a firm's capital structure policy?

financial risk

The business risk of a firm __________________.

has a positive relationship with the firm's cost of equity

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

incremental

A rate of return that plots above the security market line __________________.

indicates a security is underpriced

Which one of the following do firms NOT consider when evaluating the cash flows from a proposed project?

interest expense

Lando Lasers reduced its taxes last year by $350 by increasing its interest expense by $1,000. Which of the following terms is used to describe this tax savings?

interest tax shield

A return which plots below the security market line is an indication that the stock ____________.

is overpriced

Which one of the following is the specified date on which the principal amount of a bond is payable?

maturity

A project under consideration by McCoy Pharmaceuticals requires an initial investment in inventory of $430,000 and increasing its accounts payable to suppliers by 70 percent of that amount. The project also requires an initial investment of $500,000 to expand the warehouse space used to hold the inventory. For the project analysis, what amount should McCoy use as the initial cash flow for Net Working Capital (NWC)? Round your answer to the nearest whole dollar. For example, $1,234.56 is 1235.

net working capital = current assets - current liabilities Inventory is a current asset totaling $430,000. Accounts payable is a current liability totaling 0.7 × 430,000, or $301,000. The initial NWC is 430,000 - 301,000 = $129,000. 3. NPV is 6831.84, rounded 4. Payback is 2.50 years5. IRR is11.81, rounded 6. The NPV, IRR, and Payback rules would accept the project. It's a trifecta. 12 Notice that the inventory and payables increased, the balance sheet is going up, and therefore, the change in net working capital is a $129,000 increase. This increase is an outflow from the owners' perspective. One last thing, the warehouse is a long-term asset, PPE to be precise, so the $500,000 does not impact the net working capital. It is net capital spending.