Corporate Finance (ECO 324) Spring 2022 Textbook Questions for practice 1. Slick Mock 4 Razor Blade Project Cash Flow from Investment: Initial Investment: $800 Million The Factory will run 5 years Then machinery will be sold for scrap metal for $50 million and the firm will pay $10 million tax for the sales of the machinery. . . . Investment in Working Capital Initial (in year 0) investment in Inventories for its plant: $10 million In year I, it accumulates additional Inventory $20 million of raw materials In years, the company begins planning for the next-generation blade and it decides to reduce its inventories of raw materials to $0 million. . Total Working Capital, year-end ($ million) Investment in Working Capital (S million) Cash Flow from Investment in WC($ million) 0 10 10 1 30 20 2 30 0 3 30 0 4 30 0 5 0 -30 . 2. Cash Flow from Operation A project generates revenues of $600 million, expenses of $300 million, and depreciation charges of $160 in a particular year. The firm's tax bracket is 35 percent. 1. Find the operating cash flow of the project. 2. A new heating system costs $10 million but reduces heating costs by $3 million a year. The system will be depreciated straight-line over a 5-year period, so the annual depreciation charge will be $2 million. The firm's tax rate is 35%. Calculate the incremental effect on revenue, expenses and depreciation charges. Parameters Inflation rate Discount rate Acct receiv. as % of sales Inven, as % of revenue Tax rate 0 0.12 0 0 0.35 0 1 2 3 5 6 Year: A. Fixed assets Investments in fixed assets Sales of fixed assets CF, invest. in fixed assets 800.00 40.C B. Working capital Working capital Inventory A/R A/P Change in working capital CF, invest in wk capital C. Operations Revenues Expenses Depreciation Pretax profit Tax Profit after tax Cash flow from operations D. Project valuation Total project cash flow PV of cash flow Net present value