Relevant Cash flow scenario Assume you have just graduated from college with a d
ID: 2461623 • Letter: R
Question
Relevant Cash flow scenario Assume you have just graduated from college with a degree in finance and you are trying to explain to your boss the importance of identifying and using the appropriate cash flows when you make financial decisions. He is considering investing in a project and he has identified the following cash flows and information that he considers relevant. Forecast net income for years 1 through 8 of $450,000. Initial Investment in equipment and facility of $2,200,000 Value of equipment and facility at project's termination $200,000. The equipment will be fully depreciated by the project's end. For simplicity assume equal amounts every year. The company's marginal tax rate is 15%. Your boss expects to allocate 20% of his time to the new project and he makes $250,000 per year. The company's required return on the project is 10%. Your boss has not included any additional funds for net working capital. Your boss is basing his forecasts on the results from a product test market that the firm paid $245,000 to have conducted.
Explanation / Answer
An incremental cash flow is additional cash flow of operating activity of an organization. It receives from taking on a new project. If we accept project, the company cash flows increased.
The main categorizes of incremental cash flows are Operating activity, Financing Activity & Investing Activity.
The relevant cash flows is initial investment in equipment & project is $ 2200,000 as it is cash outflows and expected cash inflows are $ 250000 per year.