Net Present Value and Cash Essay Example for Free

Net Present prise and Cash EssayNeed to consider what types and which interchange pay heeds should be included in capital budgeting analysis. demoteD was producing and marketing two major(ip) product lines 1. Lift-Off Low suds, concentrated pulverisation. 2. Wave Traditional powder detergent. Questions amp Answers . If you were in Steve Gaspers place, would you argue to include the cost from market testing as a exchange leak? If Im Steven Gaspers I would non include the cost from market testing as a bills outflow. The reason is because the cost from market testing was considered as drop costs. A sunk cost is an outlay that has already occurred, hence by decision under considerateness would not been affected by the costs. Since sunk costs argon not incremental cost they should not be included in the analysis.In this case initial cost for Blast, $500,000 for test marketing, which was conducted in the Detroit bowl and completed in the previous June was consider as a sun k cost and it leave behind not affect Danforth amp Donnalley Laundry future change flows regardless of whether or not the new setoff is built. 2. What would your whim be as to how to deal with the question of working capital? Working capital direction deals with the management of present-day(prenominal) summations which are inventories, payroll, and other cash needs and receivables from customers, account receivable, and also procedures financing these assets.In our opinion, have two basic questions involves in working capital policy (i) What is the appropriate amount of circulating(prenominal) assets for the firm to carry both in total and for each specific account and (ii) How should current asset be financed. Therefore, the most important element in best buys working capital policy is its stemma management. Refer to the Danforth amp Donnalley washables, McDonald suggest to add another $200,000 in working capital, because they estimate this money would never leave the fi rm and would always be in liquid form, for the first time it consider outflow but hence inflow.In our opinion, some additional cash is needed to conduct operations in break inD laundry because additional some cash is needed in order to hold back for some contingency, or as a parking place for funds prior to an acquisition, a major capital investment program, or the like. That concept has been applied to more complex businesses, where it is used to analyze the effectiveness of a firms working capital management. Under relaxed current assets policy, DampD laundry would hold relatively large amounts of each type of current asset and under a confine current assets policy company would hold minimal amounts of these items.Current assets are necessary, but there are costs associated with holding them. Therefore, if DampD can manage its current assets more efficiently and thereby operate with smaller investment in working capital this will increase DampD laundry profitability. 3. Would you suggest that the product be charged for the use of excess exertion facilities and building? Would this opinion change under the hypothetical assumption that needed production facilities for the current line of powdered detergents were at 55 percent of capacity and expected to grow at a rate 20 percent a year and maximum production capacity was 100 percent?What would be the present cheer of this cash flow given the incident that the currently proposed new plant would involve cash outflows of $5 million in three years (assuming that acceptance of the Blast project would not affect the size of it of the proposed outlay, only the timing, and that the new plant and facilities would be operable indefinitely). (Hint Assume that the introduction of Blast would only become the need for a new plant ahead by one year, that the cash outflow would expect at $5 million regardless of when incurred, and that the plant would operate indefinitely. In our opinion, the excess usage of produ ction facilities and building would not be charge into Blast.The reasons of this are- a) When the motorcar was bought for Lift-Off productions the cost has been calculated and b) In obtaining the machine and building for Blast productions no cash payment has been made. Since the production of Blast will occupy current excess capacity, no incremental cash flows are incurred hence, none should be charged against Blast.Would you suggest that the cash flows resulting from erosion of sales from current laundry detergent products be included as a cash inflow? If there was a chance that competition would introduce a like product were DampD to fail to introduce Blast, would this affect your answer? Yes, it should be treat as an incremental cash flow for the reduction in the sales of the Lift-Off and Wave, referred to as erosion. These lost sales are included because it a cost (a revenue reduction) that the company must bear if it choose to produce the new product (Blast).It will not affec t our answer if there was a chance that competition would introduce a similar product at time DampD fail to introduce Blast. This happen due to the fact that for constructs cash flow we ignore the competitor effect. 5. If debt is used to finance this project, should the interest payments associated with this new debt be considered cash flows? No. We discount project cash flows with a cost of capital that is the rate of return required by all investors (not just debt holders or stockholders), and so we should discount the total amount of cash flow available to all investors.