finance-Talbot Industries is considering launching a new product.

QUESTION

Chapter 11
(11-1) Talbot Industries is considering launching a new
product. The new manufacturing equipment will cost $17 million, and production
and sales will require an initial $5 million investment in net operating
working capital. The company’s tax rate is 40%.
A.
What is the initial investment outlay?
B.
The company spent and expensed $150,000 on
research related to the new product last year. Would this change your answer?
Explain.
C.
Rather than build a new manufacturing facility,
the company plans to install the equipment in a building it owns but is now not
using. The building could be sold for $1.5 million after taxes and real estate
commissions. How would this affect your answer?

(11-2) The financial staff of Cairn Communications has
identified the following information for the first year of the roll-out of its
new proposed service:

Projected Sales
$18 million

Operating costs (not including depreciation) $9
million

Depreciation
$4 million

Interest Expense $3
million
The company faces a 40% tax rate. What is the project’s
operating cash flow for the first year (t=1)?

(11-3) Allen Air Lines must liquidate some equipment that is
being replaced. The equipment originally cost $12 million, of which 75% has
been depreciated. The used equipment can be sold today for $4 million, and its
tax rate is 40%. What is the equipment’s after-tax net salvage value?

(11-6) The Campbell Company is considering adding a robotic
paint sprayer to its production line. The sprayer’s base price is $1,080,000
and it would cost another $22,500 to install it. The machine falls into the
MACRS 3-year class, and it would be sold after 3 years for $605,000. The MACRS
rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine
would require an increase in net working capital (inventory) of $15,500. The
sprayer would not change revenues, but it is expected to save the firm $380,000
per year in before-tax operating costs, mainly labor. Campbell’s marginal tax
rate is 35%.
A.
What is the Year 0 net cash flow?
B.
What are the net operating cash flows in Years
1,2, and 3?
C.
What is the additional Year-3 cash flow (i.e.,
the after-tax salvage and the return working capital)?
D.
If the project’s cost of capital is 12%, should
the machine be purchased?

Chapter 16
(16-2) Medwig Corporation has a DSO of 17 days. The company
averages $3,500 in credit sales each day. What is the company’s average
accounts receivable?

(16-6) Snider Industries sells on terms of 2/10, net 45.
Total sales for the year are $1,500.000. Thirty percent of customers pay on the
10th day and take discounts; the other 70% pay, on average, 50 days
after their purchases.
A.
What is the days sales outstanding?
B.
What is the average amount of receivables?
C.
What would happen to average receivables if
Snider toughened its collection policy with the result that all non-discount
customers paid on the 45th day?

(16-7) Calculate the nominal annual cost of nonfree trade
credit under each of the following terms. Assume that payment is made either on
the discount date or on the due date.
A.
1/15, net 20
B.
2/10, net 60
C.
3/10, net 45
D.
2/10, net 45
E.
2/15, net 40

(16-9) Grunewald Industries sells on terms of 2/10, net 40.
Gross sales last year were $4,562,500 and accounts receivable averages
$437,500. Half of Grunewald’s customers paid on the 10th day and
took discounts. What are the nominal and effective costs of trade credit to
Grunewald’s non-discount customers? (Hint: Calculate daily sales based on a
365-day year, the calculate average receivables of discount customers and then
find the DSO for the non-discount customers.)

(16-11) Negus Enterprises has an inventory conversion period
of 50 days, an average collection period of 35 days, and a payables deferral period
of 25 days. Assume that cost of goods sold is 80% of sales.
A.
What is the length of the firm’s cash conversion
cycle?
B.
If Negus’s annual sales are $4,380,000 and all
sales are on credit, what is the firm’s investment in accounts receivable?
C.
How many times per year does Negus enterprises
turn over its inventory?

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