Gwendolyn Agapova Inc. is a software manufacturer specializing in small business
ID: 2670748 • Letter: G
Question
Gwendolyn Agapova Inc. is a software manufacturer specializing in small business operations. The company is considering introducing new alternative software. The company’s chief financial officer has collected the following information about the proposed product:
• The project has an anticipated economic life of 8 years.
• R&D costs for development of the new software were $22 million.
• The company will have to purchase new computer equipment to produce the new product. The new
equipment will cost the company $43 million to purchase and install. The equipment will be
depreciated on a straight line basis to a $7 million salvage value over its 8 year project life.
• If the company goes ahead with the new product, it will have an effect on the company’s net working
capital. At the outset (i.e. at t=0), inventory will increase by $1.5 million and accounts payable will
increase by $500,000. At t=8, the net working capital will be recovered after the project is completed.
• The new software is expected to generate sales revenue of $110 million per year for each of the next
8 years. Operating costs, excluding management salaries, are expected to be $40 million per year.
New software experts will be hired and it is estimated that these experts will be paid salaries totaling
$5 million per year.
• Because the new software is similar to some of Gwendolyn Agapova’s existing software products,
sales in the existing products will decrease by $10 million per year, once the new product gets to the
market.
• The company’s interest expense each year will be $3 million.
• The company’s tax rate is 40 percent.
31. Compute the initial outlay (at t=0) for Gwendolyn Agapova Inc. _________________
32. Calculate Gwendolyn Agapova’s operating cash flow in year 2. _________________
33. Find the non-operating cash flow in the final year of the project. _________________
Explanation / Answer
Compute the initial outlay (at t=0) for PolyGlem Inc. ___-49______________ Calculate PolyGlem’s operating cash flow in year 2. __37.2_______________ Find the non-operating cash flow in the final year of the project. _____13____
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