Case Analysis 2: The CEO of Dynamic Manufacturing was at a conference and talked to a supplier about a new piece of equipment for its production process that she believes will produce ongoing cost savings. As the Operations Manager, your CEO has asked for your perspective on whether or not to purchase the machinery. After talking to the supplier and meeting with your Engineers and Financial Analysts, you’ve gathered the following pieces of data:
• Cost of Machine: $140,000
• Estimated Annual After Tax Cash Flow Savings: $60,000 (which may or may not grow)
• Estimated machinery life: 3-5 years (after which there will be zero value for the equipment and no further cost savings)
• You seem to recall that Dynamic’s Finance organization recommends either a 10% or a 15% discount rate for all Cost Savings Projects.
Calculate the Nominal Payback, the Discounted Payback, the Net Present Value and the IRR for each scenario, assuming:
A. Ann recommends using the base assumptions above: 3 year project life, flat annual savings, 10% discount rate.
B. Bob recommends savings that grow each year: 3 year project life, 10% discount rate and a 10% compounded annual savings growth in years 2 & 3. In other words, instead of assuming savings stay flat, assume that they will grow by 10% in year 2, and then grow another 10% in year 3.
C. Cassidy believes we use a higher Discount Rate because of the risk of this type of project: 3 year project life, flat annual savings, 15% discount rate.
D. David is convinced the machine will last longer than 3 years. He recommends using a 5 Year Equipment Life: 5 year project and savings life, flat annual savings, 10% discount rate. In other words, assume that the machine will last 2 more years and deliver 2 more years of savings.
1) Which person’s scenario would you present to management and why? From a strictly financial (numbers) perspective, would you recommend this purchase to management?
2) In your opinion, which person’s scenario is based on the most aggressive assumptions? If you were to select this scenario as the basis for your proposal, how would you justify the more aggressive assumptions?
3) In SIMPLE English (as in talking to a non-Finance and non-MBA person), explain why there is value to management in running all 4 of these scenarios.
4) Beyond financial measures, what other factors would you want to consider, before making a recommendation to management? 5) If you were the CEO, would you approve this proposal? Why or why not?
***I'd appreciate if this could be broken down step by step for me, I'm having a hard time understanding where I'm going wrong with this question, thank you.
In: Finance
A CEO is considering buying an insurance policy to cover possible losses incurred by marketing a new product. If the product is a complete failure, a loss of $450,000 would be incurred; if it is a moderately failure, a loss of $150,000 would be incurred; if it is only minor failure, a loss of $50,000 would be incurred. Insurance actuaries have determined that the probabilities that the product will be a failure or only moderately successful are 0.005, 0.056 and 0.153, respectively.
In: Statistics and Probability
Consider Whirlybird, Inc. offers helicopter tours and transportation in major cities around the ... Consider Whirlybird, Inc. offers helicopter tours and transportation in major cities around the world. The company is considering a stock repurchase in the upcoming quarter. As the Chief Financial Officer (CFO), you understand there are several methods to reduce quarterly earnings, which could reduce stock price prior to the announcement of the proposed stock repurchase.
Discuss
What course of action do you recommend to the Chief Executive Officer (CEO) of Whirlybird?
If the CEO approached you recommending a reduction in current quarter earnings, how would you respond?
In: Finance
As a new senior accountant of Ferndale Rugs, Inc., an exotic rug manufacturer, you have taken on the new responsibility of variance analysis for the company. During your monthly analysis, the company’s current performance report reveals a relatively large and unusual sales volume. This is considering the past three quarters of operating in a deficit, the sales volume is favorable but the sales price variance is unfavorable. Now the CEO has asked for a recommendation on how the organization can become a lean organization and whether the theory of constraints can be implemented.
In: Accounting
On December 31, 2019, Little Corporation's Assets and Liabilities were $66,000 and $15,000 respectively. On December 31, 2020, the assets and liabilities were $94,000 and $28,000 respectively. During 2020, the company issued $7,000 of additional stock, and paid $3,000 of dividends. Determine the company’s net income for 2020.
In: Accounting
You are the nurse manager of an outpatient medical clinic. Your patients are diagnosed with heart failure. You have noticed that recently, patients have seemed unhappy with the care they receive in your office. You want to design a quality improvement project to increase patient satisfaction with their office visit. You do not know specifically why patients are unhappy.
You will create a plan to gather information to help you
understand why patients are unhappy with their care. Please do the
following:
I. Choose a method that you will use from this list. Explain why you choose this method.
1. Written survey
a. Questionnaire that the patient will complete at the end of the visit
b. Questionnaire that staff will read to the patient in a telephone interview one week after the visit.
2. Interview
a. A focus group of patients
b. One-to-one interview with the patient using open-ended questions that will take place after the visit.
II. Whichever method you choose, write an introduction to the patient
III. Write the questions you will have the patient answer – Be sure the questions are specific and will get you the most information you need to decide what the problem is at your office.
Use the above (I, II, III) sections to divide the content of your paper. Each section must have complete information.
In: Nursing
On January 1, 2019, Monica Company acquired 80 percent of Young Company’s outstanding common stock for $888,000. The fair value of the noncontrolling interest at the acquisition date was $222,000. Young reported stockholders’ equity accounts on that date as follows:
| Common stock—$10 par value | $ | 300,000 | |
| Additional paid-in capital | 70,000 | ||
| Retained earnings | 630,000 | ||
In establishing the acquisition value, Monica appraised Young's assets and ascertained that the accounting records undervalued a building (with a five-year remaining life) by $90,000. Any remaining excess acquisition-date fair value was allocated to a franchise agreement to be amortized over 10 years.
During the subsequent years, Young sold Monica inventory at a 20 percent gross profit rate. Monica consistently resold this merchandise in the year of acquisition or in the period immediately following. Transfers for the three years after this business combination was created amounted to the following:
| Year | Transfer Price | Inventory Remaining at Year-End (at transfer price) |
|||||||
| 2019 | $ | 30,000 | $ | 32,000 | |||||
| 2020 | 50,000 | 34,000 | |||||||
| 2021 | 60,000 | 40,000 | |||||||
In addition, Monica sold Young several pieces of fully depreciated equipment on January 1, 2020, for $58,000. The equipment had originally cost Monica $94,000. Young plans to depreciate these assets over a 5-year period.
In 2021, Young earns a net income of $200,000 and declares and pays $65,000 in cash dividends. These figures increase the subsidiary's Retained Earnings to a $960,000 balance at the end of 2021.
Monica employs the equity method of accounting. Hence, it reports $154,640 investment income for 2021 with an Investment account balance of $1,062,800. Prepare the worksheet entries required for the consolidation of Monica Company and Young Company. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
In: Accounting
Suppose that you are part of the Management team at Porsche. Suppose that it is the end of December 2019 and a novel coronavirus that causes a respiratory illness was identified in Wuhan City, Hubei Province, China. The illness was reported to the World Health Organization and there is heightened uncertainty around the Globe.
You (as part of the management team) are reviewing Porsche’s hedging strategy for the cash flows it expects to obtain from vehicle sales in North America during the calendar year 2020. Assume that Porsche’s management entertains three scenarios:
Scenario 1 (Expected): The expected volume of North American sales in 2020 is 35,000 vehicles.
Scenario 2 (Pandemic): The low-sales scenario is 50% lower than the expected sales volume.
Scenario 3 (High Growth): The high-sales scenario is 20% higher than the expected sales volume.
Assume, in each scenario, that the average sales price per vehicle is $85,000 and that all sales are realised at the end of December 2020. All variable costs incurred by producing an additional vehicle to be sold in North America in 2020 are billed in euros (€) and amount to €55,000 per vehicle. Shipping an additional vehicle to be sold in North America in 2020 are billed in € and amount to €3,000 per vehicle.
The current spot exchange rate is (bid-ask) $1.11/€ - $1.12/€ and forward bid-ask is $1.18/€ - $1.185/€. The option premium is 2.5% of US$ strike price, and option strike price is $1.085/€. Your finance team made the following forecasts about the exchange rates at the end of December 2020:
In: Finance
“WakeUP”, a Mississippi company that produces coffee products, sells their products throughout the United States and is considering expanding its business into Europe. If so, they will have income derived from sales to US Customers and income derived from sales within Europe. Assess the impacts that selling their products abroad will have to WakeUP and any tax incentives that will apply to their situation.
In: Accounting
Suppose that you are part of the Management team at Porsche. Suppose that it is the end of December
2019 and a novel coronavirus that causes a respiratory illness was identified in Wuhan City, Hubei
Province, China. The illness was reported to the World Health Organization and there is heightened
uncertainty around the Globe.
You (as part of the management team) are reviewing Porsche’s hedging strategy for the cash flows it
expects to obtain from vehicle sales in North America during the calendar year 2020. Assume that
Porsche’s management entertains three scenarios:
Scenario 1 (Expected): The expected volume of North American sales in 2020 is 35,000 vehicles.
Scenario 2 (Pandemic): The low-sales scenario is 50% lower than the expected sales volume.
Scenario 3 (High Growth): The high-sales scenario is 20% higher than the expected sales volume.
Assume, in each scenario, that the average sales price per vehicle is $85,000 and that all sales are
realised at the end of December 2020. All variable costs incurred by producing an additional vehicle to
be sold in North America in 2020 are billed in euros (€) and amount to €55,000 per vehicle. Shipping
an additional vehicle to be sold in North America in 2020 are billed in € and amount to €3,000 per
vehicle.
The current spot exchange rate is (bid-ask) $1.11/€ - $1.12/€ and forward bid-ask is $1.18/€ - $1.185/€.
The option premium is 2.5% of US$ strike price, and option strike price is $1.085/€. Your finance team
made the following forecasts about the exchange rates at the end of December 2020:
• bid-ask will be $1.45/€ - $1.465/€ if the investors (and speculators) consider the euro (€) a safe
haven currency during the pandemic.
• bid-ask will be $0.88/€-$0.90/€ if the investors (and speculators) consider the U.S. dollar ($) a
safe haven currency during the pandemic
1. As the CFO, you decided to hedge using option contracts. Assuming expected final sales
volume is 35,000, what are your total revenue and the percentage revenue from hedging
(compared to no hedging) (do not use any variable costs to calculate in this question)
a) if the exchange rate (bid-ask) remains at $1.11/€ - $1.12/€?
b) if the investors consider the U.S. dollar a safe haven currency during the pandemic?
2. Assume that the Scenario 2 (Pandemic) took place in 2020 and the euro became a safe haven
currency during the pandemic. What are your euro cash flows if you did not hedge, hedged
using forward contracts, and hedged using option contracts?
In: Finance