Chapter 7 Net Present Value and Capital Budget.DOCVIP

NPV and Capital Budgeting Which of the following should be treated as incremental cash flows when computing the NPV of an investment? A reduction in the sales of a company’s other products caused by the investment An expenditure on plant and equipment that has not yet been made and will be made only if the project is accepted Costs of research and development undertaken in connection with the product during the past three years Annual depreciation expense from the investment Dividend payments by the firm The resale value of plant and equipment at the end of the project’s life Salary and medical costs for production personnel who will be employed only if the project is accepted 7.2 Your company currently produces and sells steel-shaft golf clubs. The Board of Directors wants you to consider the introduction of a new line of titanium bubble woods with graphite shafts. Which of the following costs are not relevant? Land you already own that will be used for the project, but otherwise will be sold for $700,000, its market value. A $300,000 drop in your sales of steel-shaft clubs if the titanium woods with graphite shafts are introduced. $200,000 spent on Research and Development last year on graphite shafts. I only II only III only I and III only II and III only 7.3 The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. Cash flows are in $ thousands, and the corporate tax rate is 34 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $10,000 - - - - Sales Revenue - $7,000 $7,000 $7,000 $7,000 Operating Costs - 2,000 2,000 2,000 2,000 Depreciation - 2,500 2,500 2,500 2,500 Net Working Capital (end of year) 200 250 300 200 - Compute the incremental net income of the investment in each year. Compute the incremental