Robert Montoya Case Study

Case 14-Robert Montoya (A)

1. Incremental Cash Flow: The additional operating cash flow that an organization receives from taking on a new project. A positive incremental cash flow means that the company's cash flow will increase with the acceptance of the project.

No, the cash flow statement should NOT include interest expense. The return required by the investors is already accounted for in the 10% WACC.

2. No, I don’t think the $300,000 rehabilitation cost should be applied to the wine project. Like the case stated, they would have had to spend the money anyway to fix the building issues. This cost should have already been analyzed/applied in the life cycle cost when they first obtained the building.

3. In this case, $30,000 would be included in the analysis as potential rent revenue. If the project is taken on and they do not rent out the site, the potential rent revenue could be shown as lost rent revenue on the P/L.

1) Incremental cash flow is the additional cash flow- outflow or inflows- expected to result from a proposed capital expenditure. Cash flows directly affect the firm’s ability to pay bills.

The interest expense should be included in the cash flow statement since it has a tax shield effect on the cash flow related to income tax.

2) No, the $300,000 that was spent to rehab the plant should not be included. It is a sunk cost. It has to be expensed before the new wine project.

3) The potential rent should be included in the analysis as an opportunity cost.

4) The net investment outlay at year 0 is $2,500,000 and the terminal value at year 4 is $190,000, net $60,000 income tax. See spreadsheet

5) The projects operating cash flows are

Year 0 $2, 500, 00

Year 1 784,800

Year 2 900,000

Year 3 612,000

Year 4 725,200

NVP is ($87,617.79) | | | | | |

| Year | Item | Amount | PV factor | Present value |

| | Initial investment | | | |

| 0 | outlay | ($2,500,000) | 1.00 | ($2,500,000) |

| 1 | Net operating cash flow |...