Name #1 Name #2 Date Case #82 Prairie Winds Pasta – Capital Budgeting Methods & Cash Flow Estimation Summary of Case Prairie Winds Pasta is experiencing a high demand for pasta from its customers. The customers demand delivery with in one week with a maximum allowance of 10 days. The facility is running at full capacity - 24 hours a day. Question 1 Define the term “incremental cash flow.” Since the project will be financed in part by debt, should the cash flow statement include interest expense? Explain. Response: Incremental cash flows is the difference between the cash flows a company will have if it implements the new project versus the cash flows the company will have if they choose not to embark …show more content…
When a company’s product lines compete with one another this is called cannibalization. The cost of cannibalization should be included in estimating the new product’s cash flows. The decision to forgo the production of the cheaper product should also be evaluated in a capital investment cash flow analysis. The management of Prairie Winds will need to consider whether the internal and external side effects of their decisions in the capital budgeting analysis for the product lines. If the side effects increase cash flows of existing assets they are considered compliments, and they are considered substitutes if the side effects negatively effect cash flows. Question 5 What are the expected non-operating cash flows when the project is terminated in Year 10? Response: In order to arrive at the non-operating cash flows in year 10, we must add together the net cash flows from investing and financing activities. The non-operating cash flow when the project is terminated in year 10 is $902,000. Question 6 Estimate the project’s operating cash flows for each year of the project’s economic life. (Hint: Use Table 2 as a guide) Response: Expected Operating Cash Flow |Year 1 |$10,540,440 | |Year 2 |$12,316,500 | |Year 3 |$11,024,820 | |Year 4 |$10,378,980 | |Year
Here is a rundown of the variables we used to first determine the cash flows for Years 0 through 10: depreciation of equipment over the 10 years, sales minus COGS to identify gross profit, summed expenses (advertising, start-up, and Jell-o erosion only; the test market expense in Year 1 is considered a sunk cost and thus should not be included), and subtracted taxes to come up with the cash flow. When assessing the below issues, the team concluded the following
I have project that the first-year revenue of $20,000 and a 15% growth rate for the next two years. The complete cost of sales is projected to average 50% of gross sales, including 40% for the purchase of equipment and 10% for the purchase of additional items. Net income is projected to reach $70,000 in four three as sales increase and operations become more
According to his financial model, the investment generates positive cash flow, excluding the initial investment, over the life of investment. This indicates further capital will not need to be raised for
We focus on free cash flows rather than accounting profits because these are the flows that the firm receives and can reinvest. Only by examining cash flows are we able to correctly analyze the timing of the benefit or cost. Also, we are only interested in these cash flows on an after tax basis as only those flows are available to the shareholder. In addition, it is only the incremental cash flows that interest us, because, looking at the project from the point of the company as a whole, the incremental cash flows are the marginal benefits from the project and, as such, are the increased value to the firm from accepting the project.
The incremental cash flows interest us because, looking at the project from the point of the company as a whole, the incremental cash flows are the marginal benefits from the project and, as such, are the increased value to the firm from accepting the project.
A) Define the term incremental cash flow. As the project, at least constructively, will be financed in part by debt, should the cash flows include interest expense? Explain.
There are payments for material, selling and administrative expenses, tax expenses and interest expenses. In this case, Genesis energy did not have any dividends payment and that lowered their cash outflows. In this situation, cash outflows was changing very frequently, but definitely in the second year the number of cash outflows was higher than in the first year. Finally, we were able to calculate net cash gain or loss by subtracting cash inflow from cash outflow. I there was a gain if the cash inflows were higher than cash outflows and there was a loss if it was opposite. In the cash flow summary we started off with cash balance start of the month which was $10,000 and then added on the net cash gain. The total balance was called cash balance at the end of the month. It was told to us that there is a minimum cash balance desired which was $25,000 and the rest of the money was either surplus or deficit. If we had more money in the total balance than $25,000, the rest of the money would be surplus. If we would have less money in the total balance than $25,000. That would be called deficit. So in the case, that we had surplus, we would not need any external finance requirement, but if we would have deficit we would need it. Over the course of 2 years, deficit happened three times which lead to the external
4. Additional investment in land and building is a relevant cash flow, so it must be added to the initial investment, and depending on
6.The Year 0 net investment outlay for the project is $-475,000. This computed by adding the price of the machinery, installation, shipping, and the change in net working capital. The non-operating cash flow when the project is
1. Compute the Free Cash Flows for the years 2010 to 2020 for both projects
5. If debt is used to finance this project, should the interest payments associated with this new debt be considered cash flows?
The new project requires an increase in inventories in year 0 and year 3. This will change the net working capital. It will represent an outflow for year 0 and 3, and an inflow when the project terminates because we will recover it.
What is the relevance of the terminal year cash flow? Which factors must be considered when estimating the terminal year cash flow?
Every year for the next 10 years, the firm earns a profit of $11 Million. The cash flow (in $ Million) is shown below: