week 1 questions fin504.docx - The Role of Managerial...

The Role of Managerial Finance: P1-1; P1-3; P1-4; P1-5
P1–1 Liability comparisons Merideth Harper has invested $25,000 in Southwest Devel-opment
Company. The firm has recently declared bankruptcy and has $60,000 in unpaid debts. Explain the
nature of payments, if any, by Merideth in each of the following situations.
a. Southwest Development Company is a sole proprietorship owned by Ms. Harper.
b. Southwest Development Company is a 50–50 partnership of Merideth Harper and Christopher Black.
c. Southwest Development Company is a corporation.
P1–3 Cash flows It is typical for Jane to plan, monitor, and assess her financial position using cash flows
over a given period, typically a month. Jane has a savings account, and her bank loans money at 6% per
year while it offers short-term investment rates of 5%. Jane’s cash flows during August were as follows:
a. Determine Jane’s total cash inflows and cash outflows.
b. Determine the net cash flow for the month of August.
c. If there is a shortage, what are a few options open to Jane?
d. If there is a surplus, what would be a prudent strategy for her to follow?

P1–4 Marginal cost–benefit analysis and the goal of the firm Ken Allen, capital budgeting analyst for
Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes
that replacing the robotics used on the heavy truck gear line will produce total benefits of $560,000 (in
today’s dollars) over the next 5 years. The existing robotics would produce benefits of $400,000 (also in
today’s dollars) over that same period. An initial cash investment of $220,000 would be required to