# Question

This case is designed to integrate the student’s understanding of incremental cash flows for capital budgeting decisions and touches on all major topics: investment, operating cash flows, working capital, and disposal cash flows. It also requires students to apply the NPV calculations and decision rules covered in the previous chapter.

1. What is the total relevant initial investment for BioCom’s new product line? Would you include the designs and prototypes? Would you include the change in net working capital?

2. What is the cash flow resulting from disposal of the equipment at the end of the project?

3. Compute a schedule of depreciation for the plant and equipment.

4. Compute a schedule of operating cash flows for BioCom’s new product.

5. Compute a schedule of incremental cash flows for BioCom’s new product.

6. Compute the project’s net present value.

7. Does your answer to Question 6 indicate that management should accept or reject the product?

8. Challenge question. A spreadsheet is recommended for this question.

a. Recompute your answers to Questions 4 through 7 assuming sales grow at 12% per year.

b. Recompute your answers to Questions 4 through 7 assuming sales grow at 0% per year.

c. Comment on the sensitivity of the NPV to the rate of growth in sales.

1. What is the total relevant initial investment for BioCom’s new product line? Would you include the designs and prototypes? Would you include the change in net working capital?

2. What is the cash flow resulting from disposal of the equipment at the end of the project?

3. Compute a schedule of depreciation for the plant and equipment.

4. Compute a schedule of operating cash flows for BioCom’s new product.

5. Compute a schedule of incremental cash flows for BioCom’s new product.

6. Compute the project’s net present value.

7. Does your answer to Question 6 indicate that management should accept or reject the product?

8. Challenge question. A spreadsheet is recommended for this question.

a. Recompute your answers to Questions 4 through 7 assuming sales grow at 12% per year.

b. Recompute your answers to Questions 4 through 7 assuming sales grow at 0% per year.

c. Comment on the sensitivity of the NPV to the rate of growth in sales.

## Answer to relevant Questions

Volvo is looking to introduce a new “hybrid” car in the US. Their analysts estimate that they will sell 20,000 of these new cars per year. The unit cost per car is $18,000 and they plan on selling the vehicle for ...What are the two different ways to estimate the cost of equity for a firm?In Problem 4, Dunder-Mifflin, Inc. hires an investment banker for the sale of the 600,000 bonds. The investment banker charges a fee of 2% on each bond sold. What is the cost of debt to DMI if the proceeds below are before ...Leeward Sailboats is reviewing the following new boat line:At what adjusted WACCs will the company accept thisproject?R.K. Boats Inc. is in the process of making some major investments for growth and is interested in calculating their cost of equity so as to be able to correctly estimate their adjusted WACC. The firm’s common stock is ...Post your question

0