Question

Dreamtime Jewellers Limited (DJL) is a small network of jewellery stores and DJL is considering building...

Dreamtime Jewellers Limited (DJL) is a small network of jewellery stores and DJL is considering building a new store. The new store costs $2.5 million and managers plan to partly fund the store with a $1 million five-year bank loan.

In addition, DJL must spend $150,000 on excavation before they build the new store. Because this expense will reduce the new store’s profitability, managers have suggested that the excavation expense be spread out equally over the five-year analysis period.

The ATO states that excavation qualifies as a business expense in the year incurred. DJL has already spent $100,000 conducting market research to determine the most lucrative location for a new store.

If the directors approve the new store DJL anticipates that it will require an additional $400,000 of inventory today on top of the existing level of $1.5 million, and accounts payable will increase by $270,000. The accounts receivable balance will increase from the current level of $5.4 million to $6.2 million if the new store proceeds.

DJL must dispose of $120,000 of redundant jewellery equipment today if the new store is approved. The equipment initially cost $300,000 four years ago and is fully depreciated for tax purposes. Assume the company tax rate is 30%.

What are the 'cash flows at the start'?

Homework Answers

Answer #1

Cash Inflows Cash Outflows

Market Research 100,000

Cost of new store 2,500,000

Excavation cost 150,000

Tax saving on excavation cost 45,000   

Additional inventory cost 400,000   

Income from sale of redundant 120,000

jewellery

Bank loan 1,000,000

Internal sources 1,500,000

Increase in accounts payable 270,000

Increase in accounts receivable 800,000

Total 2,935,000 3,950,000

Thus there will a deficit in cash flow to the extent of $ 1,015,000

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A company manufactures fitness equipment. Two years ago, it conducted a marketing study to collect consumers’...
A company manufactures fitness equipment. Two years ago, it conducted a marketing study to collect consumers’ views and perception about a new fitness equipment that they intend to produce. The study cost them $1,000,000. Today, the company is considering introducing a new fitness equipment. The CFO has collected the following information about the proposed product. The project has an anticipated economic life of 4 years, after that it will not be continued and will be terminated. The company will have...
Strozzi Company is considering a new equipment for their factory in Torin. The equipment costs $500,000...
Strozzi Company is considering a new equipment for their factory in Torin. The equipment costs $500,000 today and it will be depreciated on a straight-line basis over five years. In addition, the company’s inventory will increase by $73,000 and accounts payable will rise by $42,000. All other operating working capital components will stay the same. The change in net working capital will be recovered at the end of third year at which time the company sells the equipment at an...
REQUIRED INVESTMENT Tannen Industries is considering an expansion. The necessary equipment would be purchased for $8...
REQUIRED INVESTMENT Tannen Industries is considering an expansion. The necessary equipment would be purchased for $8 million, and the expansion would require an additional $3 million investment in net operating working capital. The tax rate is 40%. What is the initial investment outlay? Round your answer to the nearest dollar. Write out your answer completely. For example, 13 million should be entered as 13,000,000. $ _______________ AFTER TAX SALVAGE VALUE Karsted Air Services is now in the final year of...
Parker Products manufactures a variety of household products. The company is considering introducing a new detergent....
Parker Products manufactures a variety of household products. The company is considering introducing a new detergent. The company's CFO has collected the following information about the proposed product. (Note: You may or may not need to use all of this information, use only the information that is relevant.) · The project has an anticipated economic life of 4 years. · The company will have to purchase a new machine to produce the detergent. The machine has an up-front cost (t...
Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new...
Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new line of high-protein energy smoothies. SSC's CFO has collected the following information regarding the proposed project, which is expected to last 3 years: The project can be operated at the company's Charleston plant, which is currently vacant. The project will require that the company spend $3.8 million today (t = 0) to purchase additional equipment. For tax purposes the equipment will be depreciated on...
Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new...
Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new line of high-protein energy smoothies. SSC's CFO has collected the following information regarding the proposed project, which is expected to last 3 years: The project can be operated at the company's Charleston plant, which is currently vacant. The project will require that the company spend $4.1 million today (t = 0) to purchase additional equipment. For tax purposes the equipment will be depreciated on...
Quantitative Problem: Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of...
Quantitative Problem: Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new line of high-protein energy smoothies. SSC's CFO has collected the following information regarding the proposed project, which is expected to last 3 years: The project can be operated at the company's Charleston plant, which is currently vacant. The project will require that the company spend $4 million today (t = 0) to purchase additional equipment. For tax purposes the equipment will be...
HEALTHY OPTIONS INC. Healthy Options is a Pharmaceutical Company which is considering investing in a new...
HEALTHY OPTIONS INC. Healthy Options is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardiovascular diseases. The company has to invest in equipment which costs $2,500,000 and falls within a MARCS depreciation of 5 years, and is expected to have a scrap value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents...
The Cherry & White Bike Company is a small closely-held company with two owners. Its two...
The Cherry & White Bike Company is a small closely-held company with two owners. Its two owners, Charlotte and George, have decided to expand the business. You are CWB’s accountant. Your responsibilities include maintaining all accounting records and preparing annual financial statements. CWB wants to take out a loan to expand its business in the coming year. The banks and lending institutions require a set of financial statements prepared under U.S. GAAP to evaluate CWB’s credit worthiness. You must prepare...
1. Calculating project cash flows: Why do we use forecasted incremental after-tax free cash flows instead...
1. Calculating project cash flows: Why do we use forecasted incremental after-tax free cash flows instead of forecasted accounting earnings in estimating the NPV of a project? 2. The FCF calculation: How do we calculate incremental after-tax free cash flows from forecasted earnings of a project? What are the common adjustment items? 3. The FCF calculation: How do we adjust for depreciation when we calculate incremental after-tax free cash flow from EBITDA? What is the intuition for the adjustment? 4....
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT