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.