11.1 Talbot Industries is considering launching a new product. The new manufacturingequipment will cost $17 million and production and sales will require an initial $5 millioninvestment in net operating working capital. The company’s tax rate is 40%.a. What is the initial investment outlay?b. The company spent and expensed $150 000 on research related to the new productlast year. Would this change your answer? Explain.c. Rather than build a new manufacturing facility the company plans to install theequipment in a building it owns but is not now using. The building could be sold for$1.5 million after taxes and real estate commissions. How would this affect youranswer?11.2 The financial staff of Cairn Communications has identified the following information forthe first year of the roll-out of its new proposed service:Projected sales- $18 millionOperating costs (not including depreciation)- $ 9 millionDepreciation- $ 4 millionInterest expense- $ 3 millionThe company faces a 40% tax rate. What is the project’s operating cash flow for the firstyear (t = 1)?11.3 Allen Air Lines must liquidate some equipment that is being replaced. The equipmentoriginally cost $12 million of which 75% has been depreciated. The used equipment canbe sold today for $4 million and its tax rate is 40%. What is the equipment’s after-tax netsalvage value?11.6- The Campbell Company is considering adding a robotic paint sprayer to itsproduction line. The sprayer’s base price is $1 080 000 and it would cost another$22 500 to install it. The machine falls into the MACRS 3-year class and it would besold after 3 years for $605 000. The MACRS rates for the first three years are 0.3333 0.4445 and 0.1481. The machine would require an increase in net working capital(inventory) of $15 500. The sprayer would not change revenues but it is expected tosave the firm $380 000 per year in before-tax operating costs mainly labor.Campbell’s marginal tax rate is 35%.a. What is the Year 0 net cash flow?b. What are the net operating cash flows in Years 1 2 and 3?c. What is the additional Year-3 cash flow (i.e. the after-tax salvage and the return ofworking capital)?d. If the project’s cost of capital is 12% should the machine be purchased?16.2 Medwig Corporation has a DSO of 17 days. The company averages $3 500 in credit saleseach day. What is the company’s average accounts receivable?16.6 Snider Industries sells on terms of 2/10 net 45. Total sales for the year are $1 500 000.Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay on average 50 days after their purchases.a. What is the days sales outstanding?b. What is the average amount of receivables?c. What would happen to average receivables if Snider toughened its collection policywith the result that all nondiscount customers paid on the 45th day?16.7 Calculate the nominal annual cost of nonfree trade credit under each of the followingterms. Assume that payment is made either on the discount date or on the due date.a. 1/15 net 20b. 2/10 net 60c. 3/10 net 45d. 2/10 net 45e. 2/15 net 4016.9 Grunewald Industries sells on terms of 2/10 net 40. Gross sales last year were $4 562 500and accounts receivable averaged $437 500. Half of Grunewald’s customers paid on the10th day and took discounts. What are the nominal and effective costs of trade credit toGrunewald’s nondiscount customers? (Hint: Calculate daily sales based on a 365-day year then calculate average receivables of discount customers and then find the DSO for thenondiscount customers.)16.11 Negus Enterprises has an inventory conversion period of 50 days an average collectionperiod of 35 days and a payables deferral period of 25 days. Assume that cost of goodssold is 80% of sales.a. What is the length of the firm’s cash conversion cycle?b. If Negus’s annual sales are $4 380 000 and all sales are on credit what is the firm’sinvestment in accounts receivable?c. How many times per year does Negus Enterprises turn over its inventory?
