Question

Please answer them correctly. Here are 2 short problems. Please solve all 2 problems correctly. Make sure the answers are correct. I would really appreciate your effort. Thanks.

1). Sunland, Inc., is considering investing in a new production line for eye drops. Other than investing in the equipment, the company needs to increase its cash and cash equivalents by $10,000, increase the level of inventory by $27,000, increase accounts receivable by $25,000, and increase accounts payable by $5,000 at the beginning of the project. Sunland will recover these changes in working capital at the end of the project 8 years later. Assume the appropriate discount rate is 9 percent. What are the present values of the relevant investment cash flows? (Do not round intermediate calculations. Round answer to 2 decimal places, e.g. 15.25.)

Present Value $__________?

2). Given the soaring price of gasoline, Ford is considering introducing a new production line of gas-electric hybrid sedans. The expected annual unit sales of the hybrid cars is 40,000; the price is $25,000 per car. Variable costs of production are $14,000 per car. The fixed overhead including salary of top executives is $80 million per year. However, the introduction of the hybrid sedan will decrease Ford’s sales of regular sedans by 6,000 cars per year; the regular sedans have a unit price of $20,000, a unit variable cost of $12,000, and fixed costs of $250,000 per year. Depreciation costs of the production plant are $52,000 per year. The marginal tax rate is 40 percent. What is the incremental annual cash flow from operations?

Incremental annual cash flow from operations $____________?

Answer 1

Question 1.

Cash requirement = $10000

Increase in inventory = $27000

Increase account receivable = $25000

Increase account payable = $5000

Life of the project = 8 years.

Discount rate = 9%

Working capital = ( $10000 + $27000 + $25000 ) - $5000

= $57000

Working capital recovered at the end of the project after 8 years.

Present value of the cash flow = Working capital * ( 1 / ( 1 + rate )ⁿ

= $57000 * ( 1 / ( 1 + 0.09 )⁸

= $28606.38

Question 2.

Annual sales unit = 40000

Price = $25000

variable cost = $14000

Decrease in the regular cars = 6000 cars annually

Price = $20000

Variable cost = $12000

Depreciation cost = $52000 per year.

Marginal tax rate = 40%

Fixed cost is sunk cost hence not included in the calculation of incremental cash flow.

Incremental cash flow = [ { Units of hybrid cars * ( Sale price - Variable cost ) } - { Units of regular cars * ( Sales price - Variable cost ) } ] ( 1 - tax rate ) + Tax benefit on depreciation.

= [ { 40000 * ( $25000 - $14000 ) } - { 6000 * ( $20000 - $12000 ) } ] ( 1 - 0.40 ) + $52000 * 40%

= $235220800