CH07Problems - Understanding Financial Management: A...

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Understanding Financial Management: A Practical Guide Problems and Answers Chapter 7 Capital Investments and Cash Flow Analysis 7.4. Guidelines for Estimating Project Cash Flows 1. Montvale Manufacturing Company is expanding its operations. As a result, analysts expect that during the first year of expansion, the firm’s accounts receivable will increase by $15 million, inventory levels by $28 million, accounts payable by $20 million, and wages payable by $4 million. A. How did the expansion affect Montvale’s net operating working capital (NOWC) during the first year of its expansion? B. Did the change in NOWC result in a cash inflow or a cash outflow? 2. A retail store chain is considering expanding into a new neighborhood. For the new store, the firm would pay rent of $120,000 per year. Inventory would increase by $250,000, while accounts payable would grow by $150,000 and accruals by $50,000. What is the impact of this project on the firm’s net operating working capital? 3. Solar Products Inc. plans to increase its manufacturing facilities at a cost of $75 million. Net operating working capital would increase by $5 million. The firm will have to pay flotation costs of $4 million in order to raise $75 million in new debt to fund the project. A. What type of project is this? B. What costs are relevant? 4. Rockville Enterprises plans to sell and old warehouse and build a larger, more efficient warehouse at a cost of $40 million. A year ago, the company paid architects $500,000 to design the new warehouse. Analysts estimate that the new warehouse can reduce operating costs by $1 million per year. A. What type of project is this? B. What costs are relevant? 5. Sector 9 Inc. is considering investing $50 million to develop a line of digital cameras. Because these cameras easily connect to the firm’s existing line of printers, management believes that printer revenues will increase by $6 million per year. Should the increase in printer revenue be included in the cash flow estimation? 6. Trevor Corporation pays a transportation company $400,000 per year for air delivery of its microcomputers. Concurrently, Trevor Corp. rents out its fleet of trucks to Seldom Inc. for $220,000 per year. Trevor Corp is considering ending the contract with Seldom Inc. in order to use the truck fleet to distribute its line of micro-computers on its own. Trevor Corp. would have to spend $15,000 per year to pay for additional general, selling and administrative expenses. Furthermore, Trevor Corp’s accounts receivable and accounts payable would increase by $33,000 and $20,000, respectively. If the firm undertakes this
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project, which of these cash flows are outflows and inflows if the firm undertakes this project? 7.5 Cash Flow Components
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CH07Problems - Understanding Financial Management: A...

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