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Merage Case File

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Group Name_________________ Group No. ________

Answer Sheet for Merage Capital Budgeting Case:

Q. 1: Free Cash Flow: (1 Point)

Free cash flow is determined by adding up all the company’s incoming cash and then subtract the cash that the company is obliged to payout, which includes all expenses, debt service, preferred dividend and capital expenditures related to the fiscal period.

The result tells us how much cash was left over or how short of cash the company was at the end of the fiscal period.

Q. 2: Land: (1 Point)

Nothing, as it is mentioned that the value of the land will not be significantly different after 5 years so there is no opportunity cost. The center can sale the land after 5 years. The cost has already been incurred so need not be part of current cash outflow

Q. 3: Allocated Overhead: (1 Point)

According to the with/without principle, these allocated costs are irrelevant because the Center will have to pay them even if the project is not undertaken .Further there are no incremental admin cost pertains to the project arise so no allocated expenses will be included in Cash outflow.

Q. 4: Lost Current Revenue: (1 Point)

Sales erosion should be counted as relevant cost only if they are directly related to the project. In this case the loss of sales will occur due to the new project and it is assumed that the sales erosion also increase at the same rate as sales.

Q. 5: Market Research and Technical Feasibility Study: (1 Point)

It is a Sunk cost as they are irreverent to the decision to invest. The Center has already paid for them. The with/without principle excludes sunk costs from the analysis of an investment. It should not affect the decision to start the new Center.

Attach your completed spreadsheet and provide answers to essay questions on this sheet.

Q. 6: Relevant Cash Flow:

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