What is the role of NWC and How do we define Salvage Value

Assignment Help Financial Management

Reference no: EM131488034

ADVANCED FINANCIAL MANAGEMENT ASSIGNMENT CASE STUDY

Application of Capital Budgeting Decision Rules

Company X is proposing the following capital budgeting project:

Total depreciable cost

Equipment: $220,000
Shipping and installation: $30,000

Changes in working capital

Inventories will rise by $25,000
Accounts payable will rise by $5,000

Effect on operations

New sales: 100,000 units/year @ $2/unit
Variable cost: 60% of sales

Life of the project

Economic life: 4 years
Depreciable life: ACRS 3-year class
Salvage value: $25,000

Tax rate: 40%

WACC: 11%

Determining Project Value -

Estimate the relevant cash flows recited to the project:

Calculating annual operating cash flows (OCF)
Identifying changes in working capital (NWC).
Calculating terminal cash flows (TCF) that includes after-tax salvage value and return (reimbursement) of NWC.

After you solve the case, please, shortly answer to the following questions:

1. What is the role of NWC? How is NWC recovered in the last year?

2. How do we define Salvage Value? Is there always taxes on Salvage Value and when?

3. Should financing effects (interest, dividend) be included in cash flows? If yes, why?

4. What decision should be taken by the management based on your results? Which of the capital budgeting rules is most widely used?

Reference no: EM131488034

Questions Cloud

What is the time value of money : The processes of discounting and compounding are related. Explain this relationship.

Firm international competitiveness : What impact does the dollar appreciation have on the firm's international competitiveness? What about dollar depreciation?

To what amount will the given investments accumulate : What is an annuity? Give some examples of annuities. Distinguish between an annuity and a perpetuity.

Explain five or more audit objectives for upcs capital plan : Identify and explain 5 or more audit objectives for UPC's capital plans. Provide a report of your audit, and discuss any SOX reportable issues.

What is the role of NWC and How do we define Salvage Value : FIN 600: ADVANCED FINANCIAL MANAGEMENT SPRING 2017 ASSIGNMENT CASE STUDY. What is the role of NWC? How is NWC recovered in the last year

Compute return firm should earn given its level of risk : Compute the return the firm should earn given its level of risk.

At what annual rate would the following have to be invested : Compound value solving for (n) How many years will the following take?

Manager is saying the firm is undervalued or overvalued : Determine whether the manager is saying the firm is undervalued or overvalued.

How cash and accrual accounting differs for each of events : Explain how cash and accrual accounting differs for each of the events listed in the above scenario and describe the proper accrual accounting.

User Account

All Pages