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:

Negative Externalities

Unintended adverse effects or costs imposed on a third party or the environment as a result of an economic activity.

Opt Out

The action of choosing not to participate in something.

Information about Buyers

Details or data regarding consumers’ preferences, purchasing history, and behavior patterns, important for marketing and sales strategies.

Moral Hazard

The situation where one party can take risks because they know that they will not bear the consequences of their actions, often seen in situations where individuals or institutions are protected by insurance or other safety nets.