#1 Computing terminal-year FCF: Five years ago, a pharmaceutical company bought
ID: 2680628 • Letter: #
Question
#1 Computing terminal-year FCF: Five years ago, a pharmaceutical company bought a machine that produces pain-reliever medicine at a cost of $2 million. The machine has been depreciated over the past five years, and the current book value is $1,000,000. The company decides to sell the machine now at its market price of $1 million. The marginal tax rate is 34 percent.1.What is the relevant cash flow for the machine project? $
2.What is the relevant cash flow if the market price of the machine is $600,000 instead? $
#2 Investment cash flows: Six Twelve is considering opening up a new convenience store in downtown New York City. The expected annual revenue is $700,000. To estimate the increase in working capital, analysts estimate the ratio of cash and cash equivalents to revenue to be 0.03, and the ratio of receivables to revenue to be 0.05 in the same industry. What are the incremental cash flows related to working capital when the store is opened?
$
#3 Investment cash flows: Healthy Potions, Inc., is considering investing in a new production line of eye drops. Other than investing in the equipment, the company needs to increase its cash and cash equivalents by $10,000, increase the level of inventory by $51,786, increase accounts receivable by $25,000, and increase accounts payable by $5,000 at the beginning of the investment. Healthy Potions will recover these changes in working capital at the end of the project 11 years later. If the appropriate discount rate is 14.4 percent what is the net effect on the today's value of the project?
(Round your answer to two decimal places. Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)
$
#4 Profitability index: Suppose that you faced the following projects but had only $30,000 to invest. You should invest in project(s) A and B only B and D only B and C only A, B and C or B, C and D.
Project Cost ($) NPV ($)
A $ 8,000 $4,000
B 11,000 7,000
C 9,000 5,000
D 7,000 4,000
#5 Mick
Explanation / Answer
You are not allowed to post multiple questions in one post, please repost the different questions in another post. I have answered the 1st question. What are the relevant cash flows? The gain on the sale would be $1,000,000 – $800,000 = $200,000 Taxes on the gain are: $200,000 * .3 = $60,000 Net cash flow from the sale is $1,000,000 – $60,000 = $940,000 How do they change if the market price of the machine is $600,000 instead? The gain on the sale would be $600,000 – $800,000 = $-200,000 Taxes on the gain are: $-200,000 * .3 = $-60,000 If the market price changes to $600,000 would be sold with a lost.
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