Principles of Finance

Part A (a one page response is required)

1. Describe an incremental cash flow for a project. Describe three (3) concepts we need to examine to help understand how to estimate the incremental cash flow of a project.

2. Benson Co. purchases an asset for $6,000. This asset qualifies as a seven-year recovery asset under MACRS. Benson has a tax rate of 30%. The seven-year expense percentages for years 1, 2, 3, 4, 5, and 6 are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, and 8.93%, respectively. If the asset is sold at the end of six years for $2,000, what is the cash flow from disposal? Show your work.

Part B (a ½ page response is required)

1. Briefly describe JIT inventory management.

2. Describe one (1) type of cost that is minimized with JIT control.

3. In order to use JIT, is it better to have high ordering costs or low? Provide one (1) supporting fact to justify your answer.

Part C (a ½ page response is required)

You are CEO of Acme, Inc. located in the United States. You use the discounted payback period method and accept all projects that payback in three years. You are considering a project that will cost $5,500,000 and will produce one cash flow that occurs in three years. However, the cash flow is in pesos since the project is an overseas project. The current indirect exchange rate is 13.5 pesos per dollar. The cash inflow in pesos is 100,000,000 in three years, and the discount rate is 11.5%. During this time, the anticipated annual inflation rate is 5% in the United States and 4% in Mexico.

Should you accept this project, using the discounted payback period method? Is this a good decision? Provide the six (6) steps you would utilize to determine whether or not this is a good decision.