..ooo T-Mobile 12:24 Group Assignment - Estimating relevant cash flows Doug is t
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..ooo T-Mobile 12:24 Group Assignment - Estimating relevant cash flows Doug is the owner of Campo's Lemon Ice and sells lemon icies out of a bright yellow and green truck. His old truck is small, constantly requires fixing, and doesn't have features he wants like an ice maker A new truck is rather expensive. Doug estimates a new truck with all the extras would cost S$134,000 today. Bt t would save S4,430 a year in maintenance. He also thinks having a bigger truck and an ice maker means he can drive around more without stopping for supplies and ice. This extra selling time would increase sales by $29,600 a year, though that would come with some higher costs of S10,000 (gas, CoGS, etc.). Depreciating the new truck would use 7 year MACRS (use the table from the slides or the book). The fact the new truck holds more ice and lemons has further implications, though. He thinks he will increase inventory by S4000 after buying the truck, partially funded by an increase in accounts payable of S1500 The old truck is fully depreciated, but Doug thinks he can sell the truck for $62,500 Finally, Doug thinks he will get out of the lemon icies business in 6 years. If he keeps his old truck, it would salvage for $30,000 in 6 years. If he buys a new truck, it would probably salvage for $50,000 in 6 years. He thinks his marginal tax rate will be 32% and he has a required return of 13%. Questions: 1) For each year, how will revenue change? Expenses? ciation? 2) Given that, what would the OCF be for each of the 6 years 3) What changes for Current Assets? Current Liabilities? What are the changes in Net Working Capital and when 4) Is there any salvaging here? When does salvage occur and 5) Given that, what Net Capital Spending occurs for this 6) Given the OCF, Change in NWC, and NCS, what is the will they occur? what is the effect on cash flow? project and in what years? CFFA on this project?Explanation / Answer
All the figures are in $
Answer 1
We are assuming that the Old truck is sold in Year 0 only
* Increase in Working Capital = Increase in Inventory - Increase in Accounts Payable
=4000-1500 = $ 2500
In Capital Budgeting we assumed that working capital invested in Year 0 will be recovered when the business will be closed. Therefor shown as outflow in Year 1 and Inflow in Year 6.
** We wil depreciate new truck in 7 years therefor using Straight Line method, Depreciation amount = $134000/7 = &19143 each year.
Answer 2.
Operating Cash Flow = Revenue - Expense+ Saving in Maintenance cost-Working capital
Answer 3
Changes for Current assets = Increament in Inventory = $4000
Changes in Current liability = Increament in Accounts Payable = $ 1500
Increase in Working Capital = Increase in Inventory - Increase in Accounts Payable
=4000-1500 = $ 2500
It will occur in Year 1 and Year 6
Answer 4.
Yes There are two Salvages.
Salvage from Old machine which will occur in Year 0 and the same is shown as inflow of cash in year 0
Salvage from New machine which will occur in Year 6 and the same is shown as inflow of cash in year 6.
Answer 5. Net Capital Spending Occur in Year 0 = Purchase price of New machine - Salvagge value of Old Machine = $ 134000-$62500 = $71500
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Increase in Revenue 0 29600 29600 29600 29600 29600 29600 Increase in Gas & COGS 0 -10000 -10000 -10000 -10000 -10000 -10000 Saving in Maintenance cost 0 4430 4430 4430 4430 4430 4430 Working Capital * 0 -2500 0 0 0 0 2500 Depreciation** -19143 -19143 -19143 -19143 -19143 -19143 Purchase of New Truck -134000 Sale of Old Truck 62500 Sale of New Truck 50000Related Questions
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