A1. A manufacturing company has recently expanded its production and sales levels and now needs additional storage space for its inventory of finished goods. At present the company meets this need by renting space in a nearby warehouse owned by another company. An architect has drawn up some concept plans for an extension to the company’s current warehouse and the company’s bank has provided advice on the term and interest rate of a proposed loan to finance the cost of building the extension. You have been asked to use the net present value method to advise the company on whether it should construct the warehouse extension. For each of the following, state whether the item would be included or excluded in your analysis as a cash flow and give brief reasons for your recommendation.
a) Increased cash inflows from the increased sales of the company’s products.
b) The rent currently paid to use the nearby warehouse.
c) Interest payments on the bank loan used to fund the construction.
d) The cost of the concept plans drawn up by the architect.
A2. For the following statement indicate whether the statement is true or false and explain why.
a) The weighted average cost of capital will always lie between the cost of debt and cost of equity of the firm.