Estimate incremental cash flows, Financial Management

Assignment Help:

You just recently joined Manawatu Blinds and Curtains (MBC) group, a partnership firm based in Manawatu region providing windows, dressings, and installations to both commercial and residential clients in the Palmerston North area. The main products of the company are now wooden (real wood) blinds and curtains. As a financial analyst of the company, you are asked to evaluate a new product, TIMBERLIKETM, an alternative to real-

wood wooden blinds.  This is the special kind of new material which imitates the appearance of real woods but suffers less of the effects of moisture and color fades. It is also less expensive to customers, not to mention saving the forests.

The introduction of TIMBERLIKETM blinds will require a new setup of the

production line as the preparation/manufacturing processes are totally different from the now- running wooden blind production line, which is running at its full capacity. The new production facilities will be set up in an unused section of MBC main plant, which is located in a rather secluded area of suburban Palmerston North. A new machine with an estimated

cost of $375,000 will be purchased. It will cost another $30,000 to ship over the machine while $45,000 will be spent to have it installed. In addition, MBC's inventories (e.g. uncut TIMBERLIKE panels, TIMBERLIKE blinds in process, and finished TIMBERLIKE blinds) will increase by $15,000 since the very beginning (could be a few months in reality but just for simplification). The increase in such is projected to grow about 5% each year. The machine has a remaining economic life of 4 years of which the straight-line method of depreciation will be used. The salvage value is projected as 37,500 at the end of the fourth year.

The section of the plant where the TIMBERLIKE blinds would occur has been unused for ages. Consequently, it had suffered some rundown. In fact, last year during the routine overall facilities maintenance program, MBC spent $150,000 on that section of the plant. Based on figures from the marketing department, TIMBERLIKE blinds will generate yearly $600,000 in sales for the next four years. Related fixed and variable costs (together) are estimated as 75% of sales figures. This comes with the note that the introduction of TIMBERLIKE blinds will decrease the sales of MBC's real wooden blinds by $30,000 per year. The production costs of existing wooden blind are $15,000 per year (pre-tax). The appropriate cost of capital for MBC group is 10 %. The project will be funded by 70% debt and 30% equity. The average cost of debt (e.g. interest charges) for MBC group is 6.5%. Let's assume the corporate tax rate of 30%.

QUESTIONS

1.  Calculate the initial outlay of this project.

2.  Calculate the periodic total cash flows for year 1 to year 4 of this project.

3.  Suppose another merchant in the city expressed an interest in leasing the same cite (which will be used for LIKEWOOD blind production) for $5,000 a month, how would you incorporate this information into your analysis?

4.  Express your views of additional points that should be considered beyond the available information given in this case (e.g. anything missing from a good and thorough analysis?).


Related Discussions:- Estimate incremental cash flows

Determine the movements in working capital, Movements in working capital ...

Movements in working capital The year-end balances of trade, inventories and other receivables and payables are taken for current year-end as well as last year-end statement

Financial maket, knowledge of financial market is power discuss

knowledge of financial market is power discuss

Accounting standards, Accounting Standards The paradigm shift in the e...

Accounting Standards The paradigm shift in the economic environment during last few years has led to increasing attention being devoted to accounting standards as a means towa

State the goal of shareholders wealth maximisation, Goal of Shareholders we...

Goal of Shareholders wealth maximisation Shareholders' wealth maximisation goal gives us the best results since effectsof all the decisions taken by company and its managers ar

Calculate the variance of the dollar value of your property, Assume that yo...

Assume that you hold a piece of land in the City of London that you may wish to sell in one year. Like a U.S. resident, we are concerned along with the dollar value of the land. Su

Time series analysis, In Time Series Analysis, we try to identify and deter...

In Time Series Analysis, we try to identify and determine the pattern of changes in the data collected over regular intervals of time. The data collected can be at a periodical int

Cost of capital, COST OF CAPITAL A project's Cost of Capital is the sm...

COST OF CAPITAL A project's Cost of Capital is the smallest amount of acceptable rate of return/required rate of return on funds committed to the project. It is a compensation

A-b trust, It is a trust developed by a married couple with the purpose of ...

It is a trust developed by a married couple with the purpose of minimizing estate taxes. An A-B trust is a trust that splits into two on the death of the first spouse. It is produc

What is cash flow criteria, Q. What is Cash Flow Criteria? Cash Flow Cr...

Q. What is Cash Flow Criteria? Cash Flow Criteria: - Cash flow criteria are on the basis of cash flows rather than accounting profit. Cash flow methods are separated into two s

Which method should we use to valuate young companies, Which method should ...

Which method should we use to valuate young companies with high growth but uncertain futures? Two examples were Boston Chicken and Telepizza when they began. The great majo

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd