CHAP. 9) CHOOSING AMONG INVESTMENT ALTERNATIVES 91 9.36 Two alternative cleaning
ID: 1162583 • Letter: C
Question
CHAP. 9) CHOOSING AMONG INVESTMENT ALTERNATIVES 91 9.36 Two alternative cleaning machines are being considered as replacements for an older, worn-out cleaner. The cash flows for the two mutually exclusive alternatives are presentedinTable 9-17; the MARR is 10% (a) Compute the present-worth difference of value (APW) between the two machines. (b) Compute tne incremental rate of return (Ai)on the investment difference between the two machines. (c) Which macnine should be purchased? Ans. (a) $816.33; (b) 37.9%; (c) machine w2 Table 9-17 Machine #2 End ofMachine Year #1 0 $20 000$28 000 8419.88 4 864.60 4864.60 8419.88 niin1 4864.60 8419.88 ns ps 4 864.60 4 864.60 4 864.60 8 419.88 8 419.88 8419.88Explanation / Answer
The amount of cash or cash-equivalent which the company receives or gives out by the way of payment(s) to creditors is known as cash flow. Cash flow analysis is often used to analyse the liquidity position of the company. It gives a snapshot of the amount of cash coming into the business, from where, and amount flowing out.
The free cash flow formula is:-
Free cash flow = Operating cash flow - Capital expenditure
To calculate free cash flow another way:-
you'll need the income statement and balance sheet. Start with net income and add back charges for depreciation and amortization. Make an additional adjustment for changes in working capital, which is done by subtracting current liabilities from current assets. Then subtract capital expenditure:
Net income
+ Depreciation/Amortization
- Change in Working Capital
- Capital Expenditure
----------------------------
= Free Cash Flow
Net income
+ Depreciation/Amortization
- Change in Working Capital
- Capital Expenditure
----------------------------
= Free Cash Flow