You were recently hired as Management Director of the new I Can Business Incorporated (ICBI). You have been asked to establish policies and systems for the business. The first one you choose to work on is a financial reporting system.

a 4–5-page memo that you will deliver to the ICBI Board of Directors. You will describe what a financial reporting system is and explain how the management team at ICBI should use an activity-based budget instead of an operating budget. Be sure to explain the similarities and the differences of the two. Finally, give examples of budget guidelines for ICBI. You must answer the following:

• Describe the meaning and the components of a financial reporting system.
• Explain the budget process.
• Describe a budget contingency plan.

Costs can be categorized in various ways, including the following:

• Fixed versus variable costs
• Relevant versus irrelevant costs
• Direct versus indirect

Discuss the following in your main Discussion Board post:

• Why is it important for a company to know the categorization of each cost?  
• Provide an example of each of the cost categorizations above.
• Why is it important to compare actual cost and budgeted cost?

NOK Plastics is considering the acquisition of a new plastic injection-molding machine to make a line of plastic fittings. The cost of the machine and dies is $125,000. Shipping and installation is another $8,000. NOK estimates it will need a $10,000 investment in net working capital initially, which will be recovered at the end of the life of the equipment. Sales of the new plastic fittings are expected to be $350,000 annually. Cost of goods sold are expected to be 50% of sales. Additional operating expenses are projected to be $115,000 per year over the machine’s expected 5-year useful life.  The machine will depreciated using a 5-year MACRS class life.  The equipment will be sold at the end of its useful life (5 years) for $35,000. The tax rate is 25% and the relevant discount rate is 15%. Calculate the net present value (NPV), internal rate of return (IRR), payback period (PB), and profitability index (PI) and state whether the project should be accepted.

You are analyzing the after-tax cost of debt for a firm. You know that the firm’s 12-year maturity, 18.00 percent semiannual coupon bonds are selling at a price of $1,551.95. These bonds are the only debt outstanding for the firm.

What is the current YTM of the bonds? (Round final answer to 2 decimal places, e.g. 15.25%.)

What is the after-tax cost of debt for this firm if it has a marginal tax rate of 34 percent? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

What is the current YTM of the bonds and after-tax cost of debt for this firm if the bonds are selling at par? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answers to 2 decimal places, e.g. 15.25%.)

Task:

Senior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided.

Relevant information:

1. The firm uses a 3-year cutoff when using the payback method.
2. The hurdle rate used to evaluate capital budgeting projects is 15%.

The cash flows for projects A, B and C are provided below.

1. Assume the projects are independent and answer the following:
   • Calculate the payback period for each project.
   • Which project(s) would you accept based on the payback criterion?
   • Calculate the internal rate of return (IRR) for each project.
   • Which projects would you accept based on the IRR criterion?
   • Calculate the net present value (NPV) for each project.
   • Which projects would you accept based on the NPV criterion?

2. Assume the projects are mutually exclusive and answer the following:
   • Which project(s) would you accept based on the payback criterion?
   • Which projects would you accept based on the IRR criterion?

Which projects would you accept based on the NPV criterion?

You are analyzing the cost of debt for a firm. You know that the firm’s 14-year maturity, 7.8 percent coupon bonds are selling at a price of $1,052.38. The bonds pay interest semiannually. If these bonds are the only debt outstanding for the firm, answer the following questions.

What is the current YTM of the bonds? (Round final answer to 2 decimal places, e.g. 15.25%.)

What is the after-tax cost of debt for this firm if it has a 30 percent marginal and average tax rate? (Round final answer to 2 decimal places, e.g. 15.25%.)

1. Today is the expiration day of 36 put option contracts on XYZ stock that you wrote three months ago. The premium was $2.24/share. The exercise price is 35/share. If the price of the stock today is $33/share, calculate the payoffs from your position. Calculate the profits from your position.

St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $24,000 to $46,000 per year. The new machine will cost $80,000; and it will have an estimated life of 8 years and no salvage value. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm's WACC is 10%. The old machine has been fully depreciated and has no salvage value. Should the old riveting machine be replaced by the new one? Explain your answer. Show your calculation of the after-tax cash flows, a timeline with the after-tax cash flows, and calculate the NPV.

Garcia's Truckin' Inc. is considering the purchase of a new production machine for ​$150,000. The purchase of this machine will result in an increase in earnings before interest and taxes of ​$70,000 per year. To operate the machine​ properly, workers would have to go through a brief training session that would cost ​$6,000 after taxes. It would cost ​$4,000 to install the machine properly.​ Also, because this machine is extremely​ efficient, its purchase would necessitate an increase in inventory of ​$30,000. This machine has an expected life of 10 ​years, after which it will have no salvage value.​ Finally, to purchase the new​ machine, it appears that the firm would have to borrow​ $100,000 at 9 percent interest from its local​ bank, resulting in additional interest payments of ​$9,000 per year. Assume simplified​ straight-line depreciation and that the machine is being depreciated down to​ zero, a 34 percent marginal tax​ rate, and a required rate of return of 13 percent.

a. What is the initial outlay associated with this​ project?

b. What are the annual​ after-tax cash flows associated with this project for years 1 through​ 9?

c. What is the terminal cash flow in year 10 ​(what is the annual​ after-tax cash flow in year 10 plus any additional cash flows associated with the termination of the​ project)?

d. Should the machine be​ purchased?

Each of two mutually exclusive projects involves an investment of $124,000. Net cash flows for the projects are as follows:

A.    Calculate each project's payback period. (2 Points)

B.    Compute the Net Present Value (NPV) of each project when the firm's cost of capital is 10 percent. (2 Points)

C.    Internal Rate of Return (IRR) -Your choice; based on your answer to part (B). (2 Points)

D.    Modified Internal Rate of Return (MIRR) Your choice; based on your answer to part (B). (2 Points)

An engineer wants to estimate the annual inflation-free cost of owning an aerobic digester system with a capacity of 195 million gallons per day (MGD) for the first 8 years of operation. Company records show that the cost of a similar system with a capacity of 75 MGD was $8 million five years ago. The equipment cost index has increased 26% per year since then, and the future general inflation rate is forecast to be 2% per year. He estimates that the annual operating expenses of the new system would be $440,000 per year for the first two years and increase to $441,500 per year thereafter, due to the increase in maintenance costs. Calculate the annual inflation-free cost of owning the 295-MGD system for the first 8 years. Use a cost-capacity exponent of 0.14 for the system and a market-based MARR of 8% per year.

Consider the previous question with the following new information: Fixed costs are assumed to be $500,000 per year. The company estimates the variable cost per unit (v) to be $75 and expects to sell each unit for $425. There are no taxes and the required rate of return is 22% per year. Suppose that sales are currently estimated to be 5000 units per year.

What is the degree of operating leverage?   (Round to 1 decimal place, ie 2.3)

Using your answer from above, estimate what the new monthly operating cash flow (OCF) will be if sales increase by 100 units: $   (Round your answer to the nearest whole dollar, and do NOT use commas in your response, ie. 456789)

Suppose that the Euro-denominated interest rate is 1.5%, the dollar-
denominated interest rate is 1%, and the current exchange rate is 1.42 dollars per
Euro. What is the 6-month forward exchange rate in Vancouver (i.e., C$ per 1
Euros)? What is the 6-month forward exchange rate in Milan (i.e., Euros per 1
C$)? [Assume that interest rates are annualized and continuously compounded.]