When using the free-cash flow model, cash flows are discounted at the weighted average cost of capital (WACC) and when using the dividend discount model, dividends are discounted at….
Working Capital Management and Cash Flow
Adams, Incorporated would like to add a new line of business to its existing retail business. The new line of business will be the manufacturing and distribution of animal feeds. This is a major capital project. Adams, Incorporated is aware you an in an MBA program and would like you to help analysis the viability of this major business venture based on the following information:
The production line would be set up in an empty lot the company owns.
The machinery’s invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to install the equipment.
The machinery has useful life of 4 years, and it is a MACRS 3-year asset.
The machinery is expected to have a salvage value of $25,000 after 4 years of use.
This new line of business will generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are expected to increase by 3% per year due to inflation.
Net working capital would have to increase by an amount equal to 12% of sales revenues. The firm’s tax rate is 40%, and its overall weighted average cost of capital is 10%.
1. If the company spent $40,000 last year in the upkeep of the empty lot, should this cost be included in the analysis? Why or why not?
2. Disregard the assumptions in part 1 above. What is the machinery’s depreciable basis? What are the annual depreciation expenses?
Close to 50% of the typical industrial and retail firm’s assets are held as working capital. Many newly minted college graduates work in positions that focus on working capital management, particularly in small businesses in which most new jobs are created in today’s economy.
To prepare for this Discussion: Shared Practice, select two of the following components of working capital management: the cash conversion cycle, the cash budget, inventory management, and credit policies. Think about scenarios in which your selected topics were important for informing decision making. Be sure to review the video links above and conduct additional research using academically reviewed materials, and your professional experience on working capital concepts to help develop your scenarios. Support your discussion with appropriate examples including numerical examples as necessary.
a. Ask a probing question, substantiated with additional background information, evidence or research.
b. Offer and support an alternative perspective from your own research.
300-350 Words / APA format / In-text Citation / References