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intermediate financial management

Financial Management Principles And Applications 14th Global Edition Sheridan Titman, Arthur Keown, John Martin - Solutions

(Calculating replacement project cash flows) (Related to Checkpoint 12.2 on page 418) Madrano’s Wholesale Fruit Company, located in McAllen, Texas, is considering the purchase of a new fleet of trucks to be used in the delivery of fruits and vegetables grown in the Rio Grande Valley of Texas. If
(Calculating inflation and project cash flows) After you reported your findings to Carlyle Chemicals’ management (see Study Problem 12–28), the CFO suggested that the company could purchase raw materials in advance for future delivery.This would involve paying for the raw materials today and
(Calculating inflation and project cash flows) Carlyle Chemicals is evaluating a new chemical compound used in the manufacture of a wide range of consumer products.The firm is concerned that inflation in the cost of raw materials will have an adverse effect on the project cash flows. Specifically,
(Calculating inflation and project cash flows) Jack Martin is considering whether or not to buy his first motorbike now or two years later when he has more savings. The price of the specific model that he wants to buy was $22,000 four years ago and the current price is $25,000. If inflation remains
(Calculating inflation and project cash flows) If the per hour cost of casual labor is £10 and the anticipated rate of inflation in labor prices is such that this cost is expected to rise every year, what is the expected per hour cost of casual labor for each of the next five years if inflation is
(Calculating cash flows in a comprehensive problem) Mark McNibble is CFO for McNabb Fabrications, Inc. Mark is considering a new project that involves the introduction of a new product. McNabb is in the 34 percent marginal tax bracket has a 15 percent required rate of return or discount rate for
(Calculating cash flows in a comprehensive problem) The Shome Corporation is considering a new project that involves the introduction of a new product. The firm in in the 34 percent marginal tax bracket and has a 15 percent required rate of return or discount rate for new investments. This project
(Calculating cash flows in a comprehensive problem) The Carson Distribution Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or discount rate, is considering a new project that involves the introduction of a new product. This project is expected
(Calculating project cash flows, NPV, profitability index, and internal rate of return in a comprehensive problem) (Related to Checkpoint 12.1 on page 410) Traid Winds Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or discount rate, is
(Calculating project cash flows and NPV) Garcia’s Truckin’, Inc., is considering the purchase of a new production machine for $200,000. The purchase of this machine would result in an increase in earnings before interest and taxes of $50,000 per year. To operate this machine properly, workers
(Calculating project cash flows and NPV) Raymobile Motors is considering the purchase of a new production machine for $500,000. The purchase of this machine would result in an increase in earnings before interest and taxes of $150,000 per year. To operate this machine properly, workers would have
(Calculating project cash flows and NPV) The Chung Chemical Corporation is considering the purchase of a chemical analysis machine. Although the machine being considered would result in an increase in earnings before interest and taxes of$35,000 per year, it has a purchase price of $100,000, and it
(Calculating project cash flows and NPV) Weir’s Trucking, Inc., is considering the purchase of a new production machine for $100,000. The purchase of this new machine would result in an increase in earnings before interest and taxes of $25,000 per year. To operate this machine properly, workers
(Calculating project cash flows and NPV) Reconsider your answers to Study Problem 12-16. The board of directors have just decided that the new project should have a payback period of 4 years or less. They have also decided to fund this project by borrowing money from banks at a rate of 10 percent.
(Calculating project cash flows and NPV) Howells Tools is considering the launch of a new automatic drill for construction-based firms. Market research estimates the development cost of this machine at £75,000. The machine will have a commercial salability for the next five years after which it
(Calculating project cash flows and NPV) You are considering adding new elliptical trainers to your firm’s product line of fitness equipment, and you feel you can sell 5,000 of these per year for five years (after which time this project is expected to shut down when it is learned that being fit
(Calculating project cash flows and NPV) (Related to Checkpoint 12.1 on page 410) As part of its planning for the coming Christmas season, Criswell Motorsports is considering whether to expand its product line that currently consists of skateboards to include gas-powered skateboards. The company
(Calculating operating cash flows) The management of Gemini Software Inc. (see Study Problem 12-12) is confident about this new product and believes that a revenue of £500,000 is a realistic goal. The firm is concerned that royalty payment may go up to £10,000. If the firm now faces a tax bracket
(Calculating operating cash flows) Gemini Software Inc. has developed a new gaming app that is expected to generate a total revenue of £500,000 by selling 100,000 downloads priced at £5 each. The fixed expenses for this gaming app are expected to be £400,000. The firm’s tax rate is 25 percent,
(Calculating changes in net operating working capital) Visible Fences is introducing a new product and has an expected change in net operating income of $900,000. The company has a 34 percent marginal tax rate. This project will also produce $300,000 of depreciation per year. In addition, this
(Calculating changes in net operating working capital) Faraway Fabricators, Inc., is considering the expansion of its welding and stamping division and estimates that this will require the firm’s accounts receivable to increase by 12 percent of the added sales. Moreover, Faraway estimates that
(Calculating changes in net operating working capital) Duncan Motors is introducing a new product that it expects will increase its net operating income by $300,000. The company has a 34 percent marginal tax rate. This project will also produce $50,000 of depreciation per year. In addition, it will
(Calculating changes in net operating working capital) (Related to Checkpoint 12.1 on page 410) Tetious Dimensions is introducing a new product that it expects will increase its net operating income by $475,000. The company has a 30 percent marginal tax rate. This project will also produce $200,000
(Determining relevant cash flows) Fruity Stones is considering introducing a variation of its current breakfast cereal, Jolt ’n Stones. This new cereal will be similar to the old with the exception that it will contain more sugar in the form of small pebbles. The new cereal will be called Stones
(Determining relevant cash flows) Kelly Wang runs a small interior decorating business. She is considering running a social media-based marketing campaign to boost sales. This campaign is expected to increase sales by either 6 percent, 12 percent, or 18 percent. The costs associated with the
Before accepting the deal with the retailer, Fastfoot has found that the additional manufacturing requirement will add an unexpected one-off machine upgrade cost of £75,000 (this will be an in-year cost); the capital allowances available will reduce net tax to 21 percent. What impact will this
(Identifying incremental costs for products involving pilot studies) Look back at your answer to Study Problem
(Identifying incremental earnings from lowering product prices) Apple’s (AAPL) iPad jump-started the touchscreen computer market, driving it to levels few analysts had ever dreamed possible. Moreover, the popularity of the iPad pushed Apple’s competitors to offer similar touchscreen computers.
(Identifying incremental earnings from advertising synergies) LiveOutdoors is a major camping equipment manufacturer based in Leeds, United Kingdom. One of its buyers is Megathlon, the largest retailer of activity-based outdoor products. LiveOutdoors sells£2 million worth of goods annually to
(Determining relevant cash flows) Landcruisers Plus (LP) has operated an online retail store selling off-road truck parts. As the name implies, the firm specializes in parts for the venerable Toyota FJ40, which is known throughout the world for its durability and off-road prowess. The fact that
(Identifying incremental revenues from new products) Morten Food Products, Inc., is a regional manufacturer of salty food snacks. The firm competes directly with the national brands including Frito-Lay—but only in the southeastern part of the United States.Next year Morten expects total revenues
Throughout the examples in this chapter, we have assumed that the initial investment in working capital is later recaptured when the project ends. Is this a realistic assumption? Do firms always recover 100 percent of their investment in accounts receivable and inventories?
A food manufacturing company has found that products that do not meet the quality standards of supermarkets and are currently going to waste can be reprocessed at a minimum cost and turned into animal feed. Suggest the cash flows that should be considered in assessing the viability of such a
In Finance in a Flat World: Entering New Markets on page 422, we described the importance of thinking globally when making investments. Pick a new product that you have just learned about that is being sold domestically, and describe how the product might benefit from international markets.
When McDonald’s moved into India, it faced a particularly difficult task. The major religion in India is the Hindu religion, and Hindus don’t eat beef—in fact, most of the 1 billion people living in India are vegetarians. Still, McDonald’s ventured into India and has been enormously
A multinational company is looking to open a new operating division. Revenue and cost cash flows have been identified, and the only remaining decision is whether to base the division in a higher wage and lower inflation country or a lower wage and higher inflation country. Consider the questions
What are opportunity costs, and how should they affect an investment’s cash flows?Give an example.
Consider how an IT business can help its clients to construct the cash flow benefits of the implementation of its accounting software. The main advantage will be that the software will save time. Consider this from two different perspectives: (a) a business with only marginal growth, and (b) a
What are sunk costs, and how should they be considered when evaluating an investment’s cash flows?
Describe net operating working capital, and explain how changes in this quantity affect an investment proposal’s cash flows.
If depreciation is not a cash flow item, why does it affect the level of cash flows from a project?
Discuss how free cash flow differs from a firm’s operating cash flow.
When a firm finances a new investment, it often borrows part of the money, so the interest and principal payments this creates are incremental to the project’s acceptance.Why are these expenditures not included in the project’s cash flow computation?
A food manufacturing business is looking to commission six new production lines that will double the output capacity of the business. Why should the project cash flows include an incremental cash flow for working capital?
A business is currently considering the project cash flows for the acquisition of a new subsidiary. The business is operated from a head-office in London. The CEO wants to include a flow for absorption of some head-office costs, but the CFO says this is not correct. Whom do you agree with? Explain
In Regardless of Your Major: The Internet on Airline Flights—Making It Happen on page 406, we described an investment proposal involving the sale of internet services on airlines. How would you approach the problem of calculating the cash flows for such a venture? What costs would you include in
As you saw in the introduction, the Toyota Prius took some of its sales away from other Toyota products. Toyota has also licensed its hybrid technology to Ford Motor Company, which allowed Ford to introduce a Ford Fusion hybrid in 2010 that traveled 39 miles per gallon (mpg), almost doubling the
What is the relevant depreciation expense when you are analyzing a replacement decision?
What is a replacement investment?
If you forecast nominal cash flows, should you use the nominal or the real discount rate? Why?
What is the distinction between nominal and real interest rates?
What is CAPEX, and how does it affect a project’s cash flows?
What is net operating working capital, and how does it affect a project’s cash flows?
What are the four steps used to forecast a project’s future cash flows?
What does the term free cash flow mean?
When borrowing the money needed to make an investment, is the interest expense incurred relevant to the analysis of the project? Explain.
What are some examples of synergistic effects that affect a project’s cash flows?
What are sunk costs?
What makes an investment cash flow relevant to the evaluation of an investment proposal?
Calculate the incremental cash flows for replacement-type investments.
Evaluate the effect of inflation on project cash flows.
Calculate and forecast project cash flows for expansion-type investments.
Identify incremental cash flows that are relevant to project valuation.
Do you think questions involving the risk of loss of human life should be answered using a cost-benefit analysis?Life insurance companies do this all the time in pricing life insurance policies to individuals in different age groups, so why is this different?
Do you think Daisy’s analyzed the problem of protecting its workers from the pandemic in a reasonable way?
(Solving a comprehensive problem) Garmen Technologies Inc. operates a small chain of specialty retail stores throughout the U.S. Southwest. The company markets technology-based consumer products both in its stores and over the internet, with sales split roughly equally between the two channels of
(Calculating NPV, PI, and IRR) (Related to Checkpoint 11.1 on page 367, Checkpoint 11.3 on page 374, and Checkpoint 11.4 on page 376) You are considering two independent projects, Project A and Project B. The initial cash outlay associated with Project A is $50,000, and the initial cash outlay
(Using NPV for mutually exclusive projects) You have been assigned the task of evaluating two mutually exclusive projects with the following projected cash flows:Year Project A Cash Flow Project B Cash Flow 0 $(100,000) $(100,000)1 33,000 0 2 33,000 0 3 33,000 0 4 33,000 0 5 33,000 220,000 If the
(Calculating the payback period, NPV, PI, and IRR) Rayyan Industries is considering a project with an initial cash outlay of £120,000 expected cash flows of £30,000 at the end of each year for seven years. The discount rate for this project is 12 percent.a. What are the project’s payback and
(Calculating the payback period and NPV) Plato Energy is an oil-and-gas exploration and development company located in Farmington, New Mexico. The company drills shallow wells in hopes of finding significant oil and gas deposits. The firm is considering two different drilling opportunities that
(Calculating the payback and discounted payback periods) The Bar-None Manufacturing Company manufactures fence panels used in cattle feedlots throughout the Midwest. Bar-None’s management is considering three investment projects for next year but doesn’t want to make any investment that
(Calculating the discounted payback period) The Callaway Cattle Company is considering the construction of a new feed-handling system for its feedlot in Abilene, Kansas. The new system will provide annual labor savings and reduced waste totaling $200,000, and the initial investment will be
(Calculating the discounted payback period) Gio’s Restaurants is considering a project with the following expected cash flows:Year Project Cash Flow 0 $(150 million)1 90 million 2 70 million 3 90 million 4 100 million If the project’s appropriate discount is 12 percent, what is the project’s
(Calculating NPV, PI, and IRR) (Related to Checkpoint 11.1 on page 367 and Checkpoint 11.4 on page 376) Terry Media, Inc., is considering a major expansion of its existing animation studio in California and has estimated the following cash flows associated with the expansion. The initial outlay
(Calculating MIRR) Star Industries owns and operates landfills for several municipalities throughout the U.S. Midwest. Star typically contracts with the municipality to provide landfill services for a period of 20 years. The firm then constructs a lined landfill (required by federal law) that has
(Calculating MIRR) (Related to Checkpoint 11.6 on page 382) Nadia Toys Ltd. is considering purchasing a new plastic molding machine for its plant in Wenzhou, China that costs ¥12,000,000. This new machine will produce cash inflows of¥2,000,000 at the end of Years 1 through 12.In addition to the
What is the IRR for this new plant?
(Calculating IRR for an uneven cash flow stream) Richard Cosmetics is considering the construction of a new factory for its new range of cosmetics in Michigan. The new factory will have an initial cash outlay of $8 million and will produce cash flows of $2 million at the end of Year 1, $5 million
In Year 4, the project will provide a net negative cash flow of $5,000,000 due to anticipated expansion of and repairs to the facility. During Years 5 through 10, the project will provide cash inflows of $2 million per year.a. Calculate the project’s NPV and IRR where the discount rate is 12
(Calculating MIRR) OTR Trucking runs a fleet of long-haul trucks and has recently expanded into the Midwest, where it has decided to build a maintenance facility.This project will require an initial cash outlay of $20 million and will generate annual cash inflows of $4.5 million per year for Years
In addition, in Year 5 the project will require an additional investment outlay of €6,000,000 to refurbish the complex. During Years 5 through 10, the project will provide cash inflows of €5 million per year. Calculate the project’s MIRR, given the following:a. A discount rate of 8 percentb.
(Calculating MIRR) (Related to Checkpoint 11.6 on page 382) Cine Planet is considering building a new cinema complex in Berlin. This project will require an initial cash outlay of €12 million and will generate annual cash inflows of €3.5 million per year for Years 1 through
(Calculating IRR, payback, and a missing cash flow) The Merriweather Printing Company is trying to decide on the merits of constructing a new publishing facility. The project is expected to provide a series of positive cash flows for each of the next four years. The estimated cash flows associated
(Calculating IRR and NPV) (Related to Checkpoint 11.1 on page 367 and Checkpoint 11.4 on page 376) The cash flows for three independent projects are as follows:Year Project A Project B Project C 0 (initial investment) $(50,000) $(100,000) $(450,000)1 $ 10,000 $ 25,000 $ 200,000 2 15,000 25,000
Find the IRR for this investment.
You will then receive the £7,500 at the end of Year
(Calculating IRR) Your investment advisor from Quickmoney has offered you an investment that will provide you with a single cash flow of £7,500 at the end of 15 years if you pay premiums of £250 per year in the interim period. Specifically, the annual premiums will begin immediately and extend
(Calculating IRR) Jessop Builders is considering a new project that will cost£1,600,000 and is expected to last for eight years and produce future cash flows of £300,000 per year. If the appropriate discount rate for this project is 10 percent, what is the project’s IRR?
(Calculating IRR) (Related to Checkpoint 11.4 on page 376) Determine the IRR to the nearest percent for the following projects:a. An initial outlay of €20,000 resulting in cash inflows of €4,000 at the end of Year 1,€10,000 at the end of Year 2, and €16,000 at the end of Year 3b. An initial
(Calculating NPV and IRR) (Related to Checkpoint 11.1 on page 367) East Coast Television is considering a project with an initial outlay of $X (you will have to determine this amount). It is expected that the project will produce a positive cash flow of $50,000 at the end of each year for the next
(Calculating IRR) Determine the IRRs for the following projects:a. An initial outlay of £5,000 resulting in a cash inflow of £800 at the end of each year for the next 10 yearsb. An initial outlay of £5,000 resulting in a cash inflow of £700 at the end of each year for the next 20 yearsc. An
(Calculating IRR) (Related to Checkpoint 11.1 on page 367) What are the IRRs for the following projects?a. An initial outlay of £5,000 resulting in a single cash inflow of £9,962 in 8 yearsb. An initial outlay of £5,000 resulting in a single cash inflow of £12,968 in 10 yearsc. An initial
(Calculating EAC) The Templeton Manufacturing and Distribution Company of Tacoma, Washington, is contemplating the purchase of a new conveyor belt system for one of its regional distribution facilities. Both the alternatives it is considering will accomplish the same task, but the Eclipse model
(Calculating EAC) (Related to Checkpoint 11.2 on page 370) Barry Boswell is a financial analyst for Dossman Metal Works, Inc., and he is analyzing two alternative configurations for the firm’s new plasma cutter shop. The two alternatives, denoted A and B below, will perform the same task, but
(Calculating NPV) Jackson Furniture is considering installing a new CNC router system to manufacture its custom specification furniture. This investment will require an initial outlay of £250,000 and will generate net cash inflows of £45,000 per year for 10 years.a. What is the project’s NPV
(Calculating NPV) Monroe Shipping, Inc., is considering whether to expand its logistics operations in Portland, Oregon. The expansion will require the expenditure of$12,000,000 on new automated track crane systems and will generate annual net cash inflows of $2,000,000 per year for each of the next
(Calculating NPV) (Related to Checkpoint 11.1 on page 367) Midland Metal Ltd. is considering building a new factory to produce special metal frames for boat manufacturers. This project will require an initial cash outlay of €12,000,000 and will generate annual net cash inflows of €2,500,000 per
Some analysts argue that the payback period criterion is actually a measure of project risk. What is the logic behind this belief?
What are the most widely used methods for evaluating capital expenditure projects in practice?
Discuss the merits and shortcomings of using the payback period for capital budgeting decisions.

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