QUESTION 6

1210. {Calculating changes in net operating working capital) Racin' Scooters is introducing a new product and has an expected change in net operating income of $43,000. Racin' Scooters has a 34 percent marginal tax rate. This project will also produce $100,000 of depreciation per year. In addition, this project will cause the following changes: Amme $45000 $631000 1:1ch ' ' 55.4\"} W What is the project's free cash ow for Year I? 126. (Detemiining relevant cash Home} Captain's Cereal is conde-ring inlmduoing a variation of its current breakfast cereal. Crunch Stuff. This new cereal will be similar to the old. with the exception that it will contain sugareoated marshmallows shaped in the form of stars. The new cereal will he called Crunch Stuff 11' Stars. It is estimated that the sales for the new cereal will be $25 million: however. 21] percent of those sales will (new from former Crunch Stuff customers who have switeled to Crunch Sniff n' Stars and who would not have switched ifthe new product had not been introduced. What is the relevant sales level to consider when deciding whether or not to introduce Cnmeh Stuff n' Stars? lZT. (Determining relevant cash flows} Fruity Stones is considering introducing a variation of its current breakfast cereal. Jolt '11 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 'n Stuff. It is estimated that the sales for the new cereal will be $100 million; however, 40 percent of those sales will be from former Fruit}f Stones customers who have switched to Stones '11 Stuff. These former customers will be lost regardless of whether the new product is offered because this is the amount of sales the rm expects to lose to a competitor product that is going to be introduced at about the same time. What is the relevant sales level to consider when deciding whether or not to introduce Stones 'n Stuff\"? 128. (Related to Checkpoint 12.1 on page 378) (Calculating changes In net operating working capital) Tetious Dimensions is introducing a new product that is expected to increase its net operating income by $775,000. Tetious Dimensions has a 34 percent marginal tax rate. This project will also pmduce $200900 of depreciation per year. In addition, this project will cause the following changes: .Aeemmkreeeivilble $55,960 $39,000 Irma-m 1W 159mm asalable-naepayable mom 129.000 What is the project's free cash flow for Year 1? 12-9. (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. Duncan Mo- tors has a 34 percent marginal tax rate. This project will also produce $50,000 of deprecia- tion per year. In addition, this project will cause the following changes: Without the Project With the Project Accounts receivable $33,000 $23,000 Inventory 25,000 40.000 Accounts payable 50,000 86.000 What is the project's free cash flow for Year 1