Answered: NINV = Purchase price + Additional NWC,…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter6: Accounting For Financial Management

Section: Chapter Questions

Problem 11P: The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are...

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The estimation of cash flows

Consider the case of Beak’s Birdhouse Builders Inc. (B3):

Beak’s Birdhouse Builders Inc. (B3) currently earns annual revenues of $1,500,000 and incurs total operating expenses (excluding depreciation and interest expense) of 45% of revenues. Its earnings are taxed at a rate of 40%.

Today, its budgeting committee is evaluating the purchase of a new computerized table saw. The table saw is expected to cost $15,000, plus $3,500 in freight and setup expenses, and will be depreciated using straight-line depreciation. It is expected that the table saw will have a useful life of ten years and a salvage value equal to 25% of its purchase price.

It is further expected that the table saw will increase the firm’s productivity and cause a 25.00% increase in the firm’s annual sales and total operating expenses (excluding depreciation and interest expense). If the table saw is purchased, the firm will require an additional $5,000 in net working capital (NWC).

The company’s existing table saw is almost completely worn out. It is fully depreciated and can’t even be sold for scrap. As a result, there are no expected tax consequences associated with the disposal of the old table saw.

Given this information,

1. Complete the following equation that assists in the calculation of the firm’s net investment (NINV) for the new table saw and calculate its value.

NINV = Purchase price + Shipping and Installation charges + Additional NWC, which equals $23,500.

NINV = Purchase price + Annual depreciation expense, which equals $16,388.

NINV = Purchase price + Additional NWC, which equals $20,000.

2. Complete the following tale that can be used to compute the firm’s incremental operating cash flows.

Note: Round your answers to the nearest whole dollar.

	Firm Value With Table Saw	Firm Value Without Table Saw	Net Change
Revenues		$1,500,000
Less: Expenses	$843,750		$168,750
Less: Depreciation Expense		$0
Earnings Before Taxes	$1,029,862	$825,000	$204,862
Less: Taxes	$411,945	$330,000	$81,945
Earnings After Taxes	$617,917	$495,000	$122,917
Plus: Adjustment for Non-Cash Expenses	$1,388	0	$1,388
Net Cash Flow		$495,000

3. Complete the following equation that assists in the calculation of the firm’s terminal cash flow for the new table saw and calculate its value.

NCFTNCFT = Operating After-Tax Cash Flow + Salvage value + Recovery of Net working capital, which totals $628,930

NCFTNCFT = Operating After-Tax Cash Flow + Recovery of Net working capital, which totals $624,305

NCFTNCFT = Operating After-Tax Cash Flow + Salvage value, which totals $623,930

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