..ooo T-Mobile 12:24 Group Assignment - Estimating relevant cash flows Doug is t

Question

..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

Ans 1: Revenue will increase by $29600 a year.

Expenses:

Depreciation:

Ans 2: Operating Cash Flow: For calculating operating cash flow, EAT(Earnings After Tax) has to be calculated first:

Operating Cash Flow = EBIT+Dep-Taxes

Ans 3: Changes in current asset = Increase by $4000 due to increase in inventory.

Changes in current liability = increase by $1500 due to increase in A/C payable

Net working capital changes will of $(4000-1500) = increase of $2500 in the beginning of project, i.e year 1. At the end of the project (year 6) the working capital change is generally withdrawn i.e. -2500 chnage in WC in year 6.

Ans 4:Yes.

Ans 5: Net Capital Spending will occur in Year 0, ie. today with purchase of new truck of $134,000.

Ans 6: CFFA = Operating cash flow – net capital spending – changes in net working capital

Particulars Amount Savings in maintenance 4,430 Incease in sales 29,600 Increase in costs (10,000) Net increase 24,030

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