Question

1. Panther Corporation sells boxes of chocolates. They currently offer two different types, flip flop shaped candies and sun shaped candies. Currently, the average after-tax cash flows are $83,525 per year. One of the employees, proposed a cost savings plan. Her plan was to purchase a new chocolate filing machine, which would decrease direct labor by automating some of the process. The machine costs $22,000 and would last the company 6 years. The average after-tax cash flows after the implementation are expected to be $113,665 per year. Panther Corporation's desired rate of return is 10% and tax rate of 35%

Required:

Show the annual cash flows and the NPV of the employees cost saving project

How would the BS and IS be impacted

2. On January 1, Panther Corporation purchased a packing machine, costing $62,400, by signing a promissory note with 9-year, 2.75% terms with bi-annual payments, every June and December.

Show the entire amortization schedule and highlight the total, interest and principal payment for payment number 9. Also, specify what year/month this payment occurs.

Assuming all of the terms remain the same, how much could Panther Company spend on the machine to have a bi-annual payment of $3,000?

Please use excel.

Answer 1

Solution 1
Current Situation
Year		NPAT	10% factor	NPV
1	Cash Inflow	83,525	0.9091	75,932
2	Cash Inflow	83,525	0.8264	69,029
3	Cash Inflow	83,525	0.7513	62,754
4	Cash Inflow	83,525	0.6830	57,049
5	Cash Inflow	83,525	0.6209	51,862
6	Cash Inflow	83,525	0.5645	47,148
				3,63,773
Proposed Situation
Year		NPAT	10% factor	NPV
0	Cash Outflow	22,000	1.0000	-22,000
1	Cash Inflow	1,13,665	0.9091	1,03,332
2	Cash Inflow	1,13,665	0.8264	93,938
3	Cash Inflow	1,13,665	0.7513	85,398
4	Cash Inflow	1,13,665	0.6830	77,635
5	Cash Inflow	1,13,665	0.6209	70,577
6	Cash Inflow	1,13,665	0.5645	64,161
				4,73,041
SINCE NPV IS MORE IN PROPOSED SITUATION, IT IS MORE FEASIBLE
New Asset purchased would be shown under Fixed Asset in BS
Bank or Cash Balance from which purchased would be affected in BS
Income statement would have net inflow of 1,13,665 each year
Solution 2
Cost	62,400
Periods	18	Since semianually, hence 9*2=18
Interest Cost	2.75%
Amortization formulae	62400/14.0488	PVIAF of 2.75% for 18 periods
Amortization Amount	4,442
Period	Opening Amount	Interest	Principal	Closing Amount
1	62,400	1,716	4,442	59,674
2	59,674	1,641	4,442	56,873
3	56,873	1,564	4,442	53,995
4	53,995	1,485	4,442	51,038
5	51,038	1,404	4,442	47,999
6	47,999	1,320	4,442	44,877
7	44,877	1,234	4,442	41,670
8	41,670	1,146	4,442	38,373
9	38,373	1,055	4,442	34,987
10	34,987	962	4,442	31,507
11	31,507	866	4,442	27,931
12	27,931	768	4,442	24,257
13	24,257	667	4,442	20,483
14	20,483	563	4,442	16,604
15	16,604	457	4,442	12,618
16	12,618	347	4,442	8,523
17	8,523	234	4,442	4,316
18	4,316	119	4,442	-
To have Bi Annual Payment of 3000, the cost of machine should have been
3000	14.0488	42,146
	PVIFA Factor	COST OF MACHINE