Investment Criteria
What is the investment criteria we follow above all others?
NPV
Which of these is a sunk cost
Paying for an office space we now own
The additional expense of adding a new product to our line
Additional taxes we would pay next year
A.
What is the formula for net working capital?
Current Assets - Current liabilities
Or Accounts Receivable + Inventory - Accounts Payable
What is the profitability index of a project with revenues of 1.7 million and an initial investment of 1.2 million
1.4167
What is the difference between payback period and discounted payback period?
In discounted payback period we discount the cash flows back to the present
Which of these is not included in incremental cash flow
Taxes
Interest Expense
Depreciation
Interest expense
Which of these is included in NWC
Long-term debt
PP&E
Accounts Payable
Accounts Payable
Apple plans on launching the next iphone, Apple's expected sales next year are 5.5 billion, 30% of those sales are expected to come from older models, what is the incremental revenue of the new model iphone?
3.85 billion
What is one disadvantage of Payback period
Ignores time value of money, requires arbitrary cut off point, ignores cash flows beyond the cutoff date
What is included in incremental cash flows? (3 parts)
Operating cash flow, changes in NWC, and CAPEX
Will an increase in accounts payable increase or decrease our NWC
Decrease
What is the change in NWC if the company bought inventory worth 500$ and sold $250 of that inventory the next day on credit?
total change in net working capital would be 500, Plus 250 for inventory, Plus 250 for Accounts Receivable
What does it mean for two projects to be mutually exclusive?
We can only choose one or the other
Which of these is an opportunity cost?
The amount we paid for a marketing study last year
The incremental cost we incur for offering a new product
Past R&D costs
B
Does an increase in Net Working Capital increase or decrease cash flow?
Decrease
Compute NPV and IRR for the following project assuming 12% cost of capital
Year 0 - (-50000)
Year 1 - 60000
Year 2 - 20000
19,515.31, 47.17%
When might the NPV and the IRR differ?
Unconventional cash flows, different time horizons
Explain erosion effect
When a company releases a new product, other products in their lineup may experience losses of sales
I own a landscaping business, I purchased $400 in inventory today. In year 1 I performed landscaping services on credit for $1,000 using all the inventory, in year 2 I collected on that account. What are the changes in NWC for each Year?
Year 0 - +400
Year 1 - + 600
Year 2 - (-1,000)
I bought an asset for 1.3 million dollars and depreciated it straight line to 100,000 over its 3 year life. After its lifetime, I was able to sell it on the market for 200,000, what is the depreciation expense per year and after tax salvage value given a tax rate of 30%
400000
170000