Chapter 6 Question 1 Which of the following should be treated as incremental cash flows when deciding whether to invest in a new

manufacturing plant? The site is already owned by the company, but existing buildings would need to be demolished. a. The market value of the site and existing buildings. b. Demolition costs and site clearance. c. The cost of a new access road put in last year. d. Lost earnings on other products due to executive time spent on the new facility. e. A proportion of the cost of leasing the presidents jet airplane. f. Future depreciation of the new plant. g. The reduction in the corporations tax bill resulting from tax depreciation of the new plant. h. The initial investment in inventories of raw materials. i. Money already spent on engineering design of the new plant. Question 2 The following table tracks the main components of working capital over the life of a four year project. Calculate net working capital and the cash inflows and outflows due to investment in working capital.

Question 3

Machines A and B are mutually exclusive and are expected to produce the following real cash flows: The real opportunity cost of capital is 10%. a. Calculate the NPV of each machine. b. Calculate the equivalent annual cash flow from each machine. c. Which machine should you buy? Question 4 CSC is evaluating a new project to produce encapsulators. The initial investment in plant and equipment is $500,000. Sales of encapsulators in year 1 are forecasted at $200,000 and costs at $100,000. Both are expected to increase by 10% a year in line with inflation. Profits are taxed at 35%. Working capital in each year consists of inventories of raw materials and is forecasted at 20% of sales in the following year. The project will last five years and the equipment at the end of this period will have no further value. For tax purposes the equipment can be depreciated straight-line over these five years. If the nominal discount rate is 15%, find the net present value of the project.

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