Finance Week 4 Chapter 11 and 16 Problems

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%.
What is the initial investment
outlay?The company spent and expensed
$150,000 on research related to the new product last year. Would this change
your answer? Explain.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%.
What is the Year 0 net cash
flow?What are the net operating cash
flows in Years 1,2, and 3?What is the additional Year-3
cash flow (i.e., the after-tax salvage and the return working capital)?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.
What is the days sales
outstanding?What is the average amount of
receivables?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.
1/15, net 202/10, net 603/10, net 452/10, net 452/15, 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.
What is the length of the
firm’s cash conversion cycle?If Negus’s annual sales are
$4,380,000 and all sales are on credit, what is the firm’s investment in
accounts receivable?How many times per year does
Negus enterprises turn over its inventory?

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