TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) Do not round the intermediate calculations and round the final answer to the nearest whole number.

NPV PROFILES: TIMING DIFFERENCES

An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $11 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $15.36 million. Under Plan B, cash flows would be $2.2744 million per year for 20 years. The firm's WACC is 12.7%.

a.Construct NPV profiles for Plans A and B. Round your answers to two decimal places. Round your answers to two decimal places. Do not round your immediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. If the amount is zero enter "0". Negative should be indicated by minus sign.

Discount Rate            NPV Plan A               NPV Plan B

          0%                    $...... million              $....... million

          5                       $...... million              $....... million

        10                       $...... million              $....... million

        12                       $...... million              $....... million

        15                      $....... million              $....... million

        17                      $....... million              $...... million

        20                      $....... million              $...... million

b. Identify each project's IRR. Round your answers to two decimal places.

c. Project A ___________%

d. Project B ___________%

e. Find the crossover rate. Round your answer to two decimal places. Do not round your intermediate calculations

______________%

f. Is it logical to assume that the firm would take on all avaialble independent, average-risk projects with returns greater than 12.7%?

_______________________

I all available projects with returns greater than 72% have been undertaken, does thiss mean that cash flows from past investments have an opportunity cost of only 12.7%, because all the company can do with these cash flows is to replace money that has a cost of 12.7%?

____________________

Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?

Lizard Lick Towing has sales of $601,506, COGS and SG&A totaling $212,765, depreciation expense of $122,525, and taxes paid of $80,400. A partial listing of its balance sheet accounts is as follows:

What is the amount of Lizard Lick's cash flow from assets?

Tim Tebow's Puppy Rescue has sales of $2.19 M, net income of $0.174 M, net fixed assets of $1.69 M, and current assets of $0.73 M. The firm has $0.32 M in accounts receivables. What is the common-size statement value of A/R? Enter all percentages as a decimal (ex. 25.7% as 0.257).

Dunder-Mifflin is considering opening a new branch in Columbia with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project.

At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped when the project ends. What is the NPV of this project if the firm requires a 13.7 percent rate of return? Enter the dollar amount as an integer value (ex. -$5,000.45 as -5000 or +$3,450.70 as 3451).

Cowbell Corp. is a manufacturer of musical instruments. There are 51 million shares, each selling at $80 / share with an equity beta of 1.14. The risk-free rate is 5% and the market risk premium is 9%. There is $1.00 billion in outstanding debt (face value), paying a 9% s/a coupon for 15 years, which is currently quoted at 110% of par. Assuming a 40% tax rate, what is Cowbell Corp.’s WACC?

A car currently in use was originally purchased 3 years ago for $40,000. The car is being depreciated under MACRS using a 5-year recovery period; it has 4 years of usable life remaining. The car can be sold today to net $42,000 after removal and cleanup costs. A new car, using a 3-year MACRS recovery period, can be purchased at a price of $140,000. It requires $10,000 to install the new car. If the new car is acquired, the firm will have an increase in net working capital of $20,000. The firm is subject to a 40% tax rate. This results in the firm having an initial investment of $140,160. The revenues and expenses (excluding depreciation and interest) associated with both cars are given in the table below:

Calculate the operating cash flows for years 1 through 4 associated with the new car

Calculate the operating cash flows for years 1 through 4 associated with the old car

Use the following data to compute the option price for 3M: Stock price =100; Exercise price=90; Interest rate=5%; Time to expiration= 3 months; Standard deviation = 20% per year; assume zero dividends.

A) According to the Black-Scholes model, what price should we expect for the call option? What price should we expect for the put option?

Forecasted Statements and Ratios

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2016, is shown here (millions of dollars):

Sales for 2016 were $350 million and net income for the year was $10.5 million, so the firm's profit margin was 3.0%. Upton paid dividends of $4.2 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2017. Do not round intermediate calculations.

1. If sales are projected to increase by $80 million, or 22.86%, during 2017, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
   $  million
   
2. Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places.
   %
   
3. Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2017. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt).
   Assume Upton's profit margin and dividend payout ratio will be the same in 2017 as they were in 2016. What is the amount of the line of credit reported on the 2017 forecasted balance sheets? (Hint: You don't need to forecast the income statements because the line of credit is taken out on last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2017 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Round your answers to the nearest cent.

   Upton Computers Pro Forma Balance Sheet December 31, 2017 (Millions of Dollars)
   Cash	$
   Receivables	$
   Inventories	$
   Total current assets	$
   Net fixed assets	$
   Total assets	$
   Accounts payable	$
   Notes payable	$
   Line of credit	$
   Accruals	$
   Total current liabilities	$
   Mortgage loan	$
   Common stock	$
   Retained earnings	$
   Total liabilities and equity	$

Financing Deficit

Garlington Technologies Inc.'s 2016 financial statements are shown below:

Balance Sheet as of December 31, 2016

Income Statement for December 31, 2016

Suppose that in 2017 sales increase by 20% over 2016 sales and that 2017 dividends will increase to $132,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 9%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new-debt will be in the form of a line of credit. Round your answers to the nearest dollar. Do not round intermediate calculations.

Broussard Skateboard's sales are expected to increase by 20% from $8.4 million in 2016 to $10.08 million in 2017. Its assets totaled $5 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted payout ratio is 70%. What would be the additional funds needed?

Broussard Skateboard's sales are expected to increase by 15% from $8.0 million in 2016 to $9.20 million in 2017. Its assets totaled $5 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 4%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year?

Exotic Food Inc., a food processing company located in Herndon, VA, is considering adding a new division to produce fresh ginger juice. Following the ongoing TV buzz about significant health benefits derived from ginger consumption, the managers believe this drink will be a hit. However, the CEO questions the profitability of the venture given the high costs involved. To address his concerns, you have been asked to evaluate the project using three capital budgeting techniques (i.e., NPV, IRR and Payback) and present your findings in a report.

CASE OVERVIEW

The main equipment required is a commercial food processor which costs $200,000. The shipping and installation cost of the processor from China is $50,000. The processor will be depreciated under the MACRS system using the applicable depreciation rates are 33%, 45%, 15%, and 7% respectively. Production is estimated to last for three years, and the company will exit the market before intense competition sets in and erodes profits. The market value of the processor is expected to be $100,000 after three years. Net working capital of $2,000 is required at the start, which will be recovered at the end of the project. The juice will be packaged in 20 oz. containers that sell for $3.00 each. The company expects to sell 150,000 units per year; cost of goods sold is expected to total 70% of dollar sales.

Weighted Average Cost of Capital (WACC):

Exotic Food’s common stock is currently listed at $75 per share; new preferred stock sells for $80 per share and pays a dividend of $5.00. Last year, the company paid dividends of $2.00 per share for common stock, which is expected to grow at a constant rate of 10%. The local bank is willing to finance the project at 10.5% annual interest. The company’s marginal tax rate is 35%, and the optimum target capital structure is:

Your main task is to compute and evaluate the cash flows using capital budgeting techniques, analyze the results, and present your recommendations whether the company should take on the project.

QUESTIONS

To help in the analysis, answer all the following questions. Present the analysis in one Excel file with the data, computations, formulas, and solutions. It is preferred that the Excel file be embedded inside the WORD document (question 8).

1. What is the total investment amount at the start of the project (i.e., year zero cash flow)?
2. What is the depreciation amount for each year?
   • Create a depreciation schedule
3. What is the after-tax salvage value of the equipment?
4. What is the projected net income and Operating Cash Flows (OCF) for the three years?
   • Complete an income statement for each year.
5. What are the Free Cash Flows (FCF) generated from the project?
   • Create a projected cash flow schedule
6. What is the Weighted Average Cost of Capital (WACC)?
   • Compute the after-tax cost of debt
   • Compute the cost of common equity
   • Compute the cost of preferred stock
   • Compute the Weighted Average Cost of Capital (WACC)
7. Using a WACC of 15%, apply four capital budgeting techniques to evaluate the project, assuming the Free Cash Flows are as follows:

   Years	Free Cash Flows
   0	($252,000.00)
   1	$118,625.00
   2	$127,125.00
   3	$181,000.00

   
   The four techniques are NPV, IRR, MIRR, and discounted Payback. Assume the reinvestment rate to be 8% for the MIRR. Also, assume that the business will only accept projects with a payback period of two and half years or less.
8. Which of the four techniques should be selected and why?

A project has the following incremental cash flows: for years zero, though year 4, respectively. -$2,000, $800, $700 $700, $100,000. The hurdle rate is 17%. Where is the IRR relative to this rate? A.) >70% B.) <10% C.) >100% D.) 3%