Question
A firm was created to undertake a project which required an initial cash outlay of $3 million and a $25,000 increase in working capital. The
A firm was created to undertake a project which required an initial cash outlay of $3 million and a $25,000 increase in working capital. The product sells $75 per unit. Anticipated demand is 10,000 units for the for 3 years. Annual fixed costs are $50,000 and variable costs are 35% of sales. Assume straight line depreciation with a $2.8 million salvage value and a 35% tax rate.
The firm has a $7 million par value bond issue outstanding (7,000 bonds with par values of $1,000 each) paying a 4% coupon rate, with 15 years remaining until maturity.
a. What is net working capital? How does it impact project and fim valuation?
b. | Year 0 | Year 1 | Year 2 | Year 3 | |
Initial Cost | |||||
Interest | |||||
Cfop |
c. Define and explain the cash flow from operations. Why is this used for project valuation? What must be done to this cash flow information in order to calculate firm value?
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