Working capital and capital budgeting. Farbuck's Tea Shops is thinking about opening another tea shop. The incremental cash flow (not including the working capital investment) for the first five years is as follows: Initial capital cost=$3,500,000 Operating cash flow for each year=$1,000,000 Recovery of capital assets after five years=$260,000 The hurdle rate for this project is 12%. If the initial cost of working capital is $490,000 for items such as teapots, teacups, saucers, and napkins, should Farbuck's open this new shop if it will be in business for only five years? What is the most it can invest in working capital and still have a positive net present value? Should Farbuck's open this new shop if it will be in business for only five years? (Select the best response.) A.Yes. Farbuck's should open the new shop because the project's NPV is $40,346. B.No. Farbuck's should not open the new shop because the project's NPV is −$36,311. C.No. Farbuck's should not open the new shop because the project's NPV is −$40,346. D.Yes. Farbuck's should open the new shop because the project's NPV is $36,311.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 13E: Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a...

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Working capital and capital

budgeting.

Farbuck's Tea Shops is thinking about opening another tea shop. The incremental cash flow (not including the working capital investment) for the first five years is as follows:

Initial capital

cost=$3,500,000

Operating cash flow for each

year=$1,000,000

Recovery of capital assets after five

years=$260,000

The hurdle rate for this project is

12%.

If the initial cost of working capital is

$490,000

for items such as teapots, teacups, saucers, and napkins, should Farbuck's open this new shop if it will be in business for only five years? What is the most it can invest in working capital and still have a positive net present value?

Should Farbuck's open this new shop if it will be in business for only five years? (Select the best response.)

A.Yes. Farbuck's should open the new shop because the project's NPV is $40,346.

B.No. Farbuck's should not open the new shop because the project's NPV is −$36,311.

C.No. Farbuck's should not open the new shop because the project's NPV is −$40,346.

D.Yes. Farbuck's should open the new shop because the project's NPV is $36,311.

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