Relevant Cashflow Hbs
Autor: Tim • December 26, 2017 • 1,154 Words (5 Pages) • 544 Views
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B. Standard charge of 1percent of sales for overhead has not been included.
C. The financing charge of 10 percent of book value of assets has been left out.
For each item show separately its incremental effect on NPV as appropriate.
Items (in thousands of dollars)
T=0
T=1 to 4
T=5
1
Revenues
12,000
12,000
2
Raw Material Costs
4,000
4,000
3
Direct costs
1,000
1,000
4
Depreciation
4,000
4,000
5
EBIT (1-2-3-4)
3,000
3,000
6
Tax Rate 40% of 5
1,200
1,200
7
NOPAT (5-6)
1,800
1,800
8
Increase in Inventories
-400
0
400
9
Capital Expenditures
-20,000
0
0
10
Cash Flow of Project (7+4+8+9)
-20,400
5,800
6,200
11
NPV of line 10 @11%
$1,274
A: Estimate incremental NPV by including accounts receivables and payables? Show
Calculations. (2 Points)
Change in WCR
Amount
Accounts receivable
$1,644
(sales/365)* 50
Accounts Payable
$493
(cogs+ change in Inventory /365)*36
(Raw material cost+ Direct costs)+increse in Inventory)*36/365
Net Increase in WCR
$1,151
Net Incremental NPV @ 11%
T=0
T=1 to 4
T=5
Cash flow
-20400
4650,5800,5800,5800
6200
Name of the student: Amit Tiwari
PGP Max ID: 81500411
B. Should standard charge of 1% of Sales for overhead be included? Why? Why not? 30 words or less. (Show any calculations if appropriate) (2 Points)
According to the with/without principle the allocated overhead costs are irrelevant because the firm have to bear them even if the project is not undertaken.so standard charge of 1% of sales for Overhead should not be included in the relevant cash flow.
C. Should financing charge be included? Why? Why not? 30 words or less. (Show any calculations if appropriate) (2 Points)
Financing costs are cash flows to the investors who fund the project, not cash flows from the project .As project is being analyzed using the NPV approach the projects expected cash flow stream is discounted at the project’s cost of capital and which in turn is the cost of financing the project i.e. project’s Cost of Capital.
So financing costs should be ignored while estimating relevant cash flow in order to avoid double treatment of the same.
Name of the student: Amit Tiwari
PGP Max ID: 81500411
Question 3: This question is based on previous question. (6 Points)
The CFO is also concerned about following three additional items. First, it is expected that the new product will cannibalize after tax cash flows of an existing product by as much as $650,000 each year. Second, a currently unused building will be used to produce the new product. The building can be rented for $100,000 (after tax) annually. Finally, the firm paid $500,000 to a consultant for a marketing study for the new product. The CFO has asked you to advise him for these items. For each item, show separately incremental effect on NPV and provide calculations as necessary.
- Cannibalization: (2 Points)
The relevant cash flows related to the project will be reduced by the Loss of sales of existing product (relevant cost) $ 650000 p.a as the new product has a cannibalization effect on the existing product .The relevant cash flows related to the new project will be reduced. Hence the NPV will also get reduced.
T=0
T=1 to 4
T=5
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