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:

Total Profit

The total financial gain made by a business after subtracting all costs and expenses from total revenue.

Short Run

A time period in economics during which at least one input is fixed and cannot be changed by the firm, contrasting with the long run where all inputs are variable.

Average Variable Cost

The total variable cost divided by the quantity of output produced; it is the cost of producing an additional unit of a good or service.

Purely Competitive

Market structures characterized by many buyers and sellers, where no single entity has the market power to influence the price of a homogeneous product.