Q: How do profits and cash flow differ from each other, and why is it important to understand both âprofitsâ and âcash flowâ of your company?
Q: How do profits and cash flow differ from each other, and why is it important to understand both âprofitsâ and âcash flowâ of your company?
Related questions
Working capital and capital budgeting.Farbuck's Tea Shops is thinking about opening another tea shop. The incremental cash flowâ (not including the working capitalâ investment) for the first five years is asâ follows:
| Initial capital costequals=â$3,500,000 Operating cash flow for each year equals=â$1,000,000 Recovery of capital assets after five years equals=â$260,000 | | ||||||||||
The hurdle rate for this project is 12â%. If the initial cost of working capital is $490,000 for items such asâ teapots, teacups,â saucers, andâ napkins, shouldâ Farbuck's open this new shop if it will be in business for only fiveâ years? What is the most it can invest in working capital and still have a positive net presentâ value?
Shouldâ Farbuck's open this new shop if it will be in business for only fiveâ years?âââ(Select the bestâ response.)
A.Yes. Farbuck's should open the new shop because the project's NPV is $ 38329.
B.No. Farbuck's should not open the new shop because the project's NPV is â$38,329.
C.No. Farbuck's should not open the new shop because the project's NPV is â$40,346.
D.Yes.Farbuck's should open the new shop because the project's NPV is $40,346.
