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Ch.13 Problem 17.

Working capital and capital budgeting. Farbucks Tea Shops is thinking about opening another tea shop. The incremental cash flow for the first five years is as follows:

Initial capital cost = $3,500,000 Operating cash flow for each year = $1,000,000 Recovery of capital assets after five years = $250,000

The hurdle rate for this project is 12%. If the initial cost of working capital is $500,000 for items such as teapots, teacups, saucers, and napkins, should Farbucks open this new shop if it will be in business for only five years? What is the most it can invest in working capital and still have a positive net present value?

Ch.13 Problem 18.

Working capital and capital budgeting. Working capital investment is 25% of the anticipated first year sales for Wallys Waffle House. The first-year sales are currently projected at $4,300,000. The incremental cash flow (not including working capital investment) is

Initial cash flow = $13,700,000 outflow Cash flow years 1 through 10 = $2,850,000

What is the internal rate of return of the ten-year project with working capital factored into the cash flow? What is the net present value at a 15% weighted average cost of capital? What is the maximum investment in working capital for an acceptable project with a 15% weighted average cost of capital?