Questions (Include your answers following each question.)
1. What is Sullivan’s corporate cost of capital? Is the cost of capital the same as the cost of debt? Why or why not?
2. Define incremental cash flow, and then set forth the fresh papaya project’s operating cash flow statement for the first year of operation.
3. Since the project will be financed in part by debt, should the cash flow statement include interest expenses? Explain.
4. Should the $100,000 that was spent to rehabilitate the plant be included in the analysis? Explain.
5. What is Sullivan’s Year 0 investment outlay on this project? What is the expected nonoperating cash flow when the project is terminated?
6. What is the project’s estimated net cash flow stream?
7. What is the project’s NPV, IRR, and modified IRR (MIRR), margin of error and
payback? Should the project be undertaken?
For depreciation, you first need to determine the depreciable basis of the purchased equipment. After finding this value, you will then apply the percentages
1 yr 33%
2 yr 45%
3 yr 15%
4 yr 7%