Chapter 11 Solutions

* Avoided depreciation expenses on their garbage trucks by both assigning unsupported and inflated salvage values and extending their useful lives,

The decision to forgo the production of the cheaper product should also be evaluated in a capital investment cash flow analysis. The management of Prairie Winds will need to consider whether the internal and external side effects of their decisions in the capital budgeting analysis for the product lines. If the side effects increase cash flows of existing assets they are considered compliments, and they are considered substitutes if the side effects negatively effect cash flows.

A capital expenditure is an amount spent to acquire or improve a long-term asset such as equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and Equipment. The cost (except for the cost of land) will then be charged to depreciation expense over the useful life of the asset.

Additionally, if down the road cash flow becomes an issue, a quick sale of the facility may not be possible.

Helen easily sells the San Francisco house in which she and Tom live. Helen is the sole owner of the house. However, she has a harder time finding the right home in Portland. Helen has to make several trips to Portland before buying a house under construction. It will not be available for

The property, according to Alexander, was aesthetically desirable and had profit potential; additionally the asking price of $350,000 was within his price range. Some renovation on the property was needed and the cost approximates $165,000 according to a contractor. After preparing an income and expense statement, Alexander projected a cash flow before financing of $61,510, without any allowance for the work he would do himself. He also planned to live in the top floor apartment with his wife “rent free”, while making money by managing and renting. With time of the essence, he had to act fast and take the property off the market before a potential investor got ahead of him.

* Accumulation of costs exceeds the amount expected for acquisition or construction of the asset

* A new project idea which requires an investment of $2 mm and will generate total cash flows (including any salvage or terminal value) next year of either $4mm (recession) or $8mm (boom). The firm has not yet raised the cash to make this investment, but the market is aware of the investment opportunity.

Larry Landlord has recently renovated an apartment and has put it on the market to be rented for $800.00 a month. Larry Landlord has been in business for approximately five (5) years and has had both positive and negative experiences with tenants. Larry Landlord is hoping to find a good, long-term tenant for his apartment. Roger Renter saw Larry’s sign for the apartment for rent and thought the location and the apartment would be perfect. Roger met Larry to look at the apartment and Roger fell in love with it. All of the interior fixtures had been replaced and the unit had a nice

An example of this may be that a new programme area is not financially viable must be given an opportunity to grow with any surplus costs being covered by another programme that is financially more successful.

Two discounted cash flow analyses accompany this memo. Part A contains an adjustment for possible business erosion at Rotterdam, while part B does not make that adjustment.

Premises remodeling in the amount of $20,000, which, we consider to be sunk costs because it will not significantly increase the value of the property.

2. The single most important assessment in Cash Flows in the “cash flow from financial operations” because it provides an overlook on management’s operating decisions. In this case, we can see that Reebok had reported positive cash flows from operations, for example in 1990 reported $39.2M while LA Gear reported a negative (40M) the same year. Looking closely, we can see that LA Gear was retaining huge quantities of inventory while at the same time, not collecting enough money from customers (A/R). Hence we can conclude that for Reebok, operations was a source of cash but on the other hand, LA Gear was quite the opposite: operations was a use (or drain) of cash. Turning our attention to “cash flows from financing activities” we can see that more differences. Reebok is borrowing little money, instead it is paying loans. LA Gear is borrowing huge quantities of money, for example in 1990 it borrowed $56M. As a result of this, we can see where the money to finance

2. The $150,000 test marketing cost should not be included in the analysis because it is a sunk cost. A sunk cost is an outlay related to the project that

The company entered into dubious transactions, especially with Doug Mather. This helped contribute to the cash flow problems. The company needs to avoid these transactions in the future.