Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 6, Problem 1PS
Cash flows* Which of the following should be treated as incremental cash flows when deciding whether to invest in a new manufacturing plant? The site is already owned by the company, but existing buildings would need to be demolished.
- a. The market value of the site and existing buildings.
- b. Demolition costs and site clearance.
- c. The cost of a new access road put in last year.
- d. Lost earnings on other products due to executive time spent on the new facility.
- e. A proportion of the cost of leasing the president’s jet airplane.
- f. Future
depreciation of the new plant. - g. The reduction in the corporation’s tax bill resulting from tax depreciation of the new plant.
- h. The initial investment in inventories of raw materials.
- i. Money already spent on engineering design of the new plant.
Expert Solution & Answer
Summary Introduction
To determine: The items that must be treated as incremental cash flows at the time of taking decision on whether to invest in a new manufacturing plant.
Incremental cash flow is the extra operating cash flow that a firm receives from taking on a new project.
Sunk cost is a cost which is already incurred or met by the firm and it cannot able to recover.
Non-cash expenses are the expenses for which there is no exact cash outflow is happening but it is recorded in the books of accounts.
Explanation of Solution
Determine the items which can be treated as incremental cash flow:
| Item name | Category |
| a | Incremental cash flow |
| b | Incremental cash flow |
| c | Sunk cost |
| d | Incremental cash flow |
| e | Overhead cost |
| f | Non-cash expense |
| g | Incremental cash flow |
| h | Incremental cash flow |
| i | Sunk cost |
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REQUIRED 1
Determine the payback period of the investment. (Round your answer to 1 decimal place.)
Payback period
______
years
Payback Method
The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:
Required:
1. Determine the payback period of the investment.
2. Would the payback period be affected if the cash inflow in the last year were several times as large?
Chapter 6 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 6 - Cash flows Which of the following should be...Ch. 6 - Real and nominal flows Mr. Art Deco will be paid...Ch. 6 - Cash flows True or false? a. A projects...Ch. 6 - Depreciation How does the PV of depreciation tax...Ch. 6 - Working capital The following table tracks the...Ch. 6 - Prob. 6PSCh. 6 - Prob. 7PSCh. 6 - Mutually exclusive investments and project lives...Ch. 6 - Replacement decisions Machine C was purchased five...Ch. 6 - Prob. 10PS
Ch. 6 - Prob. 12PSCh. 6 - Working capital Each of the following statements...Ch. 6 - Depreciation Ms. T. Potts, the treasurer of Ideal...Ch. 6 - Project NPV and IRR A project requires an initial...Ch. 6 - Project NPV A widget manufacturer currently...Ch. 6 - Project NPV Marsha Jones has bought a used...Ch. 6 - Project NPV United Pigpen is considering a...Ch. 6 - Project NPV Hindustan Motors has been producing...Ch. 6 - Equivalent annual cash flows As a result of...Ch. 6 - Prob. 25PSCh. 6 - Replacement decisions Hayden Inc. has a number of...Ch. 6 - Prob. 27PSCh. 6 - Prob. 28PSCh. 6 - Prob. 29PSCh. 6 - Prob. 30PSCh. 6 - The cost of excess capacity The presidents...Ch. 6 - Effective tax rates One measure of the effective...Ch. 6 - Equivalent annual costs We warned that equivalent...
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