The most obvious cost in a capital budget is the actual cost of the capital expenditure item. We must also consider other costs that will be incurred when we make the capital expenditure (purchase). These costs are important to include because they can be the difference between a successful implementation of the capital expenditure item and staying on budget. After reviewing the textbook readings, provide an example of a healthcare capital expenditure. Explain the rationale behind the purpose of a capital expenditure budget. In addition, include two other cost considerations and explain their inclusion in your capital budget plan. For example, if you are installing an Electronic Medical Records (EMR), you must include future cost for maintenance, software updates, new computers, etc. These are the hidden costs of operation often not considered in a capital budget.

Provide an example of and describe an investment asset, a consumption asset and one that might be a mix of the two. Explain the impact of this classification on the valuation of a futures/forward price? What must be included as costs in one type that is not a concern the other type. What is the main difference between the two when it comes to closing out the contract?

Discuss the following two statements:

1- the corporate charter and the bylaws of a company are legal documents; therefore, they should not be examined by the auditors. If the auditor wants information about these documents, an attorney should be consulted.

2- the most important audit procedure to verify dividends for the year is a comparison of a random sample of cancelled dividends checks with a dividend list that has been prepared by management as of the dividend record date.

Big Retailer (BR) follows a moderate current asset investment policy, but is now considering a change, perhaps to a restricted or maybe to a relaxed policy. BR’s annual sales are $1,400,000; its fixed assets are $950,000; its target capital structure calls for 40% debt and 60% equity; its EBIT is $450,000; the interest rate on debt is 8%; and its tax rate is 20%. With a restricted policy, current assets will be 20% of sales, while under a relaxed policy, current assets will be 35% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

Refer to the table below and calculate both the real and nominal rates of return on the TIPS bond in the second and third years. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Suppose that today’s date is April 15. A bond with a 9% coupon paid semiannually every January 15 and July 15 is quoted as selling at an ask price of 1,015.000. If you buy the bond from a dealer today, what price will you pay for it? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 8.5% and face value $1,000. Find the imputed interest income in the first, second, and last year of the bond's life. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Masters Corp. issues two bonds with 18-year maturities. Both bonds are callable at $1,075. The first bond is issued at a deep discount with a coupon rate of 6% to yield 11.3%. The second bond is issued at par value with a coupon rate of 12.50%

Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $30 per share and pays a dividend of $3 a share. The common stock sells for $16 per share and has a beta of 0.8. There are 4 million common shares outstanding. The market risk premium is 10%, the risk-free rate is 6%, and the firm’s tax rate is 40%.

BOOK-VALUE BALANCE SHEET (Figures in $ millions) Assets Liabilities and Net Worth Cash and short-term securities $ 2.0 Bonds, coupon = 5%, paid annually (maturity = 10 years, current yield to maturity = 6%) $ 12.0 Accounts receivable 4.0 Preferred stock (par value $15 per share) 3.0 Inventories 8.0 Common stock (par value $0.10) 0.4 Plant and equipment 20.0 Additional paid-in stockholders’ equity 7.6 Retained earnings 11.0 Total $ 34.0 Total $ 34.0

a. What is the market debt-to-value ratio of the firm? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b. What is University’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .7. It’s considering building a new $70 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.3 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 6.9 percent of the amount raised. The required return on the company’s new equity is 13 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.4 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 4 percent, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .10. (Assume there is no difference between the pretax and aftertax accounts payable cost.) What is the NPV of the new plant? Assume that PC has a 23 percent tax rate. (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

What is the impact on deferred tax asset and deferred tax liability if a company records accelerated depreciation for tax purposes and straight-line depreciation for book purposes?

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .7. It’s considering building a new $70 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.3 million in perpetuity. The company raises all equity from outside financing. There are three financing options:

1. A new issue of common stock: The flotation costs of the new common stock would be 6.9 percent of the amount raised. The required return on the company’s new equity is 13 percent.

2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.4 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 4 percent, they will sell at par.

3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .10. (Assume there is no difference between the pretax and aftertax accounts payable cost.)

What is the NPV of the new plant? Assume that PC has a 23 percent tax rate. (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

NEW PROJECT ANALYSIS

You must evaluate a proposal to buy a new milling machine. The base price is $145,000, and shipping and installation costs would add another $6,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $94,250. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $5,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $37,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

1. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
   $

2. What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base price is $145,000, and shipping and installation costs would add another $6,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $94,250. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $5,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $37,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

How should the $5,000 spent last year be handled?

1. Only the tax effect of the research expenses should be included in the analysis.

2. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.

3. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

4. Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

5. The cost of research is an incremental cash flow and should be included in the analysis.

What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. $

What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

Should the machine be purchased?

Global Services is considering a promotional campaign that will increase annual credit sales by $650,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:  
  

     
All $650,000 of the sales will be collectible. However, collection costs will be 6 percent of sales, and production and selling costs will be 76 percent of sales. The cost to carry inventory will be 4 percent of inventory. Depreciation expense on plant and equipment will be 10 percent of plant and equipment. The tax rate is 35 percent.

a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together.
  

    

b. Compute the accounts receivable collection costs and production and selling costs and then add the two figures together.
  

   

c. Compute the costs of carrying inventory.
  

   

d. Compute the depreciation expense on new plant and equipment.
  

     

e. Compute the total of all costs from parts b through d.
  

   

f. Compute income after taxes.
  

   

g-1. What is the aftertax rate of return? (Input your answer as a percent rounded to 2 decimal places.)
  

    

g-2. If the firm has a required return on investment of 12 percent, should it undertake the promotional campaign described throughout this problem?
  

rev: 10_26_2016_QC_CS-66795