1. Lottie's Boutique needs to maintain 20% of its sales in net working capital. Lottie's is considering a three-year project that will increase sales from their current level of $110,000 to $130,000 the first year and $145,000 a year for the following two years. What amount should be included in the project analysis for the last year of the project in regards to the net working capital?
a. -$35,000
b. -$7,000
c. $0
d. $7,000
e. $35,000
2. Alto Music is a levered company providing musical instruments and supplies through its retail outlets. The company is considering expanding into art supplies. Since this is an entirely new venture, the company should
increase the project’s initial cost by a factor of (1 + Company β) to offset the increased risk.
use the pure play approach to assign a discount rate to the project.
use the current company beta when computing the required risk premium for the project.
use the company’s cost of equity as the project’s discount rate.
use the market beta when computing the project’s discount rate