Lazy Lawnmower
FI-480-01
Financial Policy
The Lazy Mower Case Submission 3
April 1, 2013
This assignment was completed without assistance
1) Prepare a Pro Forma Statement showing the annual cash flows resulting from the Lazy Mower project. a) What is the year zero or project cost?
Investment in Working Capital | -900,000 | Capital Investment | -20,000,000 | Total Cash Flow | -20,900,000 |
b) What are the annual operating cash flows?
Whole bottom line c) What are the terminal cash flows?
Depreciation amounts Salvage value + operating cash flow 2) Calculate the project’s NPV, IRR and Cash Payback.
IRR= 61%
NPV= $11,051,576
Cash Payback= 1.7011 3) Should the project be accepted? Defend your answer.
Due to the fact that the NPV is positive at $11,051,576 and the IRR at 61% is higher than the cost of capital; the project should create revenue for the firm and therefore should be accepted.
8.) Explain why is interest expense excluded from the cash flow calculations?
Interest expense should be excluded from cash flow calculations because interest is a financing expense and is already included in cost of capital when calculating net present value (NPV). If I was to deduct interest expense again I would be counting it twice.
9.) If the company had spent $600,000 in developing the prototype of the Lazy Mower.
How should Dave and Rick treat this item in their report? Explain. The $600,000 spent developing the prototype for the lazy mower should be considered a sunk cost because the money was spent prior to making the decision whether or not to accept the project.
11.) No calulations required. Assume that inflation is expected to average 5 percent per year over the next 4 years. d) Does it appear that the project’s cash flow estimates are real or nominal? e) Is the 14 percent cost of capital a nominal or a real rate? f) Is the current NPV biased, and if so, in what
Financial Policy
The Lazy Mower Case Submission 3
April 1, 2013
This assignment was completed without assistance
1) Prepare a Pro Forma Statement showing the annual cash flows resulting from the Lazy Mower project. a) What is the year zero or project cost?
Investment in Working Capital | -900,000 | Capital Investment | -20,000,000 | Total Cash Flow | -20,900,000 |
b) What are the annual operating cash flows?
Whole bottom line c) What are the terminal cash flows?
Depreciation amounts Salvage value + operating cash flow 2) Calculate the project’s NPV, IRR and Cash Payback.
IRR= 61%
NPV= $11,051,576
Cash Payback= 1.7011 3) Should the project be accepted? Defend your answer.
Due to the fact that the NPV is positive at $11,051,576 and the IRR at 61% is higher than the cost of capital; the project should create revenue for the firm and therefore should be accepted.
8.) Explain why is interest expense excluded from the cash flow calculations?
Interest expense should be excluded from cash flow calculations because interest is a financing expense and is already included in cost of capital when calculating net present value (NPV). If I was to deduct interest expense again I would be counting it twice.
9.) If the company had spent $600,000 in developing the prototype of the Lazy Mower.
How should Dave and Rick treat this item in their report? Explain. The $600,000 spent developing the prototype for the lazy mower should be considered a sunk cost because the money was spent prior to making the decision whether or not to accept the project.
11.) No calulations required. Assume that inflation is expected to average 5 percent per year over the next 4 years. d) Does it appear that the project’s cash flow estimates are real or nominal? e) Is the 14 percent cost of capital a nominal or a real rate? f) Is the current NPV biased, and if so, in what