PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 30, Problem 7PS
Summary Introduction
To evaluate: Operational manager’s proposal.
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The Clayton Manufacturing Company is considering an investment in a new automated inventory system for its warehouse that will provide cash savings to the firm over the next eight years. The firms CFO anticipates additional earnings before interest, taxes, depreciation, and amortization (EBITDA) from cost savings equal to $220,000 for the first year of operation of the centre; over the next seven years, the firm estimates that this amount will grow at a rate of 6% per year. The system will require an initial investment of $600,000 that will be depreciated over an eight-year period using straight-line depreciation of $75,000 per year and a zero estimated salvage value. The firms tax rate is 35% and the cost of capital for the project is 12%. What is the projects annual free cash flow (FCF) in year 2? A. $169,250 B. $206,784 C. S 186,925 D. $177,830
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A company is planning to purchase 90,800 units of a particular item in the year ahead. The item is purchased in boxes each containing 10units of the item, at a price of $200 per box. A safety inventory of 250 boxes is kept.
Besides, the company estimates to be charged the transporation cost of $15 per order. It should be assumed that ordering costs change in proportion to the number of orders place. The cost of holding an item in inventory for a year (including insurance, interest and space costs) is 15% of the purchase price.
The cost of placing and receiving orders is to be estimated from cost data collected relating to similar orders, where costs of $5,910 were incurred on 30 orders. It should be assumed that ordering costs change in proportion to the number of orders placed. 2% should be added to the above ordering costs to allow for inflation. Assume that usage of the item will be even over the year.
Required
a. Calculate…
Garrett Industries turns over its inventory six times each year; it has an average collection period of 35 days and an average payment period of 30 days. The firm’s annual sales are $ 5 million, costs of goods sold $ 1 million while other operating costs excluding depreciation $ 2 million.
Based on the data find the firm’s cash conversion cycle and resource investment requirement if it makes the following changes simultaneously:
(1) Shortens the average age of inventory by 5 days.
(2) Speeds the collection of accounts receivable by an average of 10 days.
(3) Extends the average payment period by 10 days.
If the firm pays 13% WACC, by how much, if anything, could it reduce annual costs of working capital financing?
Chapter 30 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 30 - Prob. 1PSCh. 30 - Components of working capital True or false? a....Ch. 30 - Inventory True or false? a. Just-in-time inventory...Ch. 30 - Inventory What are the trade-offs involved in the...Ch. 30 - Prob. 5PSCh. 30 - Prob. 6PSCh. 30 - Prob. 7PSCh. 30 - Prob. 8PSCh. 30 - Prob. 9PSCh. 30 - Credit terms Phoenix Lambert currently sells its...
Ch. 30 - Prob. 11PSCh. 30 - Prob. 12PSCh. 30 - Prob. 13PSCh. 30 - Prob. 14PSCh. 30 - Prob. 15PSCh. 30 - Credit policy How should your willingness to grant...Ch. 30 - Prob. 17PSCh. 30 - Prob. 18PSCh. 30 - Prob. 19PSCh. 30 - Prob. 20PSCh. 30 - Cash management Complete the passage that follows...Ch. 30 - Prob. 22PSCh. 30 - Prob. 23PSCh. 30 - Prob. 24PSCh. 30 - Prob. 25PSCh. 30 - Prob. 26PSCh. 30 - Prob. 27PSCh. 30 - Prob. 28PSCh. 30 - Prob. 29PSCh. 30 - Prob. 30PSCh. 30 - Prob. 31PSCh. 30 - Prob. 32PSCh. 30 - Prob. 34PSCh. 30 - Prob. 35PSCh. 30 - Prob. 36PSCh. 30 - After-tax yields Suppose you are a wealthy...Ch. 30 - Prob. 38PSCh. 30 - Prob. 39PS
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