Net Present Value and Cash Essay

Need to consider what types and which bills go downs should be acceptd in bang-up budgeting analysis. D& group AD was producing and marketing two major product lines 1. Lift-Off Low suds, concentrated powder. 2. Wave Traditional powder detergent. Questions & Answers . If you were in Steve Gaspers place, would you argue to include the apostrophize from market testing as a cash outflow? If Im Steven Gaspers I would not include the cost from market testing as a cash outflow. The reason is because the cost from market testing was considered as sunk costs. A sunk cost is an outlay that has already occurred, hence by decision under consideration would not been seeed by the costs. Since sunk costs be not additive 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 area and completed in the preceding June was consider as a sunk cost and it will not affect Danforth & Donn onlyey La undry future cash flows regardless of whether or not the new branch is built. 2. What would your opinion be as to how to deal with the question of working dandy? Working capital management deals with the management of watercourse assets 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 discriminate amount of authoritative 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 outstanding element in best buys working capital policy is its inventory management. Refer to the Danforth & Donnalley laundry, McDonald show to add another $200,000 in working capital, because they foreshadow this money would never leave the firm and would always be in liquid form, for the first time it consider outflow but hence inflow.In our opinion, some additional cash is required to conduct operations in D&D laundry because additional some cash is take in order to reserve for some contingency, or as a parking place for funds prior to an acquisition, a major capital enthronization 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, D&D laundry would hold relatively large amounts of each type of current asset and under a restricted current assets policy telephoner would hold minimal amounts of these items.Current assets are necessary, but there are costs associated with holding them. Therefore, if D&D discharge manage its current assets more efficiently and thereby operate with smaller investment in working capital this will increase D&D laundry profitability. 3. Would you suggest that the product be charged for the use of excess production f acilities and building? Would this opinion change under the hypothetical boldness 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 value of this cash flow given the concomitant that the currently proposed new ingraft would involve cash outflows of $5 million in three years (assuming that acceptance of the Blast project would not affect the size 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 move the need for a new plant ahead by one year, that the cash outflow would remain at $5 million regardless of when incurred, and that the plant would operate indefinitely. In our opinion, the excess employment of production facilities and building would not be charge into Blast.The reasons of this are- a) When the machine 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 fortune that competition would release a similar product were D&D 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 affect our answer if there was a chance that competition would introduce a simi lar product at time D&D 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.