Homework Answers
Answer:
The reduction in inventory cannot be ignored, since it is a direct effect of purchasing the new equipment. A reduction in inventory will free up working capital funds available to the company and should be considered for capital budgeting.
The $50,000 cash does not reduce the cost of the equipment, it is a source of fund. Like any source of fund, it will have a cost associated with it. Since it is own funds, the cost associated with will be opportunity cost. As a result, the entire value of the equipment will have to be taken into account for the purpose of capital budgeting.
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capital expenditure proposals for the purchase of equipment. The
capital budget is limited to $250,000, which Lapides believes is
the maximum capital it can raise. The financial adviser is
preparing an analysis of four projects that the company is
considering, as follows:
Instructions
a. Calculate the cash payback period for each of the four
projects.
b. Calculate the net present value for each project at a cost of
capital of...
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capital expenditure proposals for the purchase of equipment. The
capital budget is limited to $250,000, which Lapides believes is
the maximum capital it can raise. The financial adviser is
preparing an analysis of four projects that the company is
considering, as follows:
Instructions
a. Calculate the cash payback period for each of the four
projects.
b. Calculate the net present value for each project at a cost of
capital of...
3. Identifying incremental cash flows Aa Aa E When firms make capital budgeting decisions, they should concern themselves with incremental cash flows, not net income, when evaluating projects. To determine the incremental cash flows associated with a capital project, an analyst should include all of the following except: The project's fixed-asset expenditures Changes in net working capital associated with the project The project's depreciation expense The project's financing costs Indirect cash flows often affect a firm's capital budgeting decisions. However,...
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