Use the Information Below to Answer the Following Questions -When a New Investment Requires an Increase in Working Capital

question 23

Multiple Choice

Use the information below to answer the following questions.
Han Ltd supplies chilli paste to large supermarket chains. The company is currently considering scrapping the old processor and investing in a new processor. Information about the investment is as follows: $$\begin{array} { l r } \text { Initial investment in processor } & \$ 105,000 \\\text { Operating cash flows over next 5 years: } & \\\quad \text { Cash receipts } & \$ 80,000 \\\quad \text { Cash payments } & \$ 40,000 \\\text { Residual value of processor in 5 years } & \$ 5,000 \\\text { Required rate of return } & 8 \% \\\text { Depreciation per antum } & \$ 20,000\end{array}$$
-When a new investment requires an increase in working capital (e.g., accounts receivable, inventory) the analysis should incorporate this by:

• A)recording a cash outflow in Year 0 and a cash inflow at the end of the project.
• B)recording a cash inflow at the end of the project.
• C)evenly dividing the amount of working capital as a cash outflow for each year of the investment.
• D)doing nothing as there is a nil impact on cash flows.

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Definitions:

Feudalism

A legal arrangement in preindustrial Europe that bound peasants to the land and obliged them to give their landlords a set part of the harvest. In exchange, landlords were required to protect peasants from marauders and open their storehouses and feed the peasants if crops failed.

Manufacturing Production

The process of converting raw materials or components into finished goods through the use of machinery and labor in factories.

Means of Production

The resources, such as land, factories, and tools, required for the production of goods and services.

Proletariat

In Marx’s usage, is the working class. Members of the proletariat perform physical labor but do not own means of production. They are thus in a position to earn wages.