Woodbridge Manufacturing Company case

1. Why is it necessary to subtract expected cash flows for an existing project from the new product expected cash flows?

2. Why is it necessary to subtract depreciation, a non-cash expense, in calculating the project cash flows, and then add it back after calculating taxes?

3. Why is it necessary to add working capital requirements (additional inventory and accounts receivable only no accounts payable) to the project's cash flows? Why do you think the author believes that the collection of the full book value (= the carrying value on the accounting records) of the inventory in five years is questionable?

4. How is it that $12,979 in receivables and inventory were added due to this project at time 1, and then $14,469 was recovered at the end of the project? Where did the additional $1,490 come from?

5. What is the most appropriate depreciation method to use in calculating the cash flows ((a) Financial accounting depreciation (could be a wide range of methods), (b) tax depreciation (An accelerated method in the US), or (c) straight-line depreciation (divide the total depreciable basis (= the amount spent for the machine plus freight and installation) by the number of years of expected usage)? Explain why

far-sight