After carefully reviewing the company’s current financial situation, management team has decided to review the Proposed budget for year 2 and you are requested to prepare revised budget in accordance with organisational budgetary requirements for year 2 & 3.

Use appropriate software to prepare the budget and then attach it to this assessment tool.

Additional information:

Annual sales are expected to increase by 20% each year

COST OF GOODS SOLD are expected to increase by 5% each year

Advertising costs are expected to increase by $500 each year

Depreciation charges are the same each year

Annual rent is expected to increase by 5% each year

Superannuation is 9.5 % of wages each year

Wages are expected to increase by 6% each year

All other operating expenses are expected to increase by 2% each year

X Company is considering a new processor that costs $150,000. Shipping and setup costs for the new processor are estimated to be $15,000. X’s working capital requirement is expected to increase by $17,000 when the new processor begins operation and is expected to be fully recoverable at the end of the project. The new processor’s useful life is expected to be 5 years and its salvage value at that point is estimated to be $60,000. The new processor is being depreciated using a 5-year ACRS life. Assume a tax rate of 35% and a cost of capital of 12%. Estimated incremental revenues and incremental cash operating expenses for the new processor before tax for each year are shown in the table below.

Q1. What is the cost of the initial outlay?

Q2. Given the initial outlay for the new processor, assume the following yearly incremental after-tax cash flows (below) . Assume a cost of capital of 12%. What is the NPV of the Project?

Q3. Given the initial outlay for the new processor, assume the following yearly incremental cash flows (below). Assume a cost of capital of 12%. What is the IRR of the Project?

1) Based on the following assumptions and financial information, select all the true statements.

(1) Selling price per unit, variable cost per unit, and total fixed costs do not change during the four years.

(2) There is no beginning inventory at Year 1.

2)

Sales above the break-even point will result in net profit equal to _______.

(a) Someone offers you a security which pays $n at the end of the nth year until forever (i.e., it pays $1 at the end of the first year, $2 at the end of the second year, and so on). If the annually compounded interest rate is10% per year, what is the fair price of such security?

(b) (Rule of 69) People in the banks have a quick way of finding outhow long it takes to double your money. The trick is to divide 69 by the continuously compounded interest rate (in percentage). For example,if the continuously compounded interest rate is 10% per year, then you know it takes 69/10 = 6.9 years to double your money. Why 69? Can you figure out a similar rule to find out the number of years it takes to triple your money? [Note: “Continuous compounding” means that thecompounding limit is∞; that is, if one dollar invested at interest rater, continuously compounded, then one year later the balance becomes e^r= limm→∞(1 +r/m)m.]

(c) You just signed a 30-year lease agreement for a business property. The monthly rent for the first year is $1,000/month, with the first monthly rent due today. Starting from the second year on ward, the monthly rent will be increased by 10%/year (i.e., the monthly rent for the second year will be $1,100, the monthly rent for the third year will be $1,000(1.10)2= $1,210,1 and so on). Assuming the annually compounded interest rate is 15%/year, what is the present value of the 360 rental payments.

Brookite Company (BC) wants to purchase a new machine costing $500,000 which will last 12 years to make Hoverboard – a new product. Because BC deals in products that are consumer oriented where tastes change rapidly, they assume a useful life for their products of 5 years. This machine could be sold for $200,000 at the end of Year 5 or for $50,000 at the end of 12 years.

• Brookite will have to increase its inventory and accounts receivable by $150,000 at the beginning of year 1 and by an additional $50,000 at the beginning of Year 2. They can recover only $150,000 of this working capital investment at the end of Year 5.
• Assume all of the following cash inflows occur at the end of the year.
• The new product revenues are expected to be as follows:

       Year 1          $400,000

       Year 2          $500,000

       Year 3          $700,000

       Year 4          $700,000

       Year 5          $300,000

• Cash outflows for the production of the Hoverboard will be 50% of revenues in Years 1, 2, and 3 and 60% of revenues in Years 4 and 5.
• BC will spend $100,000 on an advertising campaign in Year 1
• An additional $20,000 will be spent on advertising each year for years 2-5 (treat as an annuity)
• As part of the decision whether to make the Hoverboard, BC spent $100,000 on a preliminary market study last year.
• The machine will be in a CCA class where the rate is 20% . Taxes are 40% and Brookite requires 10% rate of return.

Should Brookite Company purchase this new machine? Include a calculation of the net present value, margin of safety and discounted payback . Also include qualitative points that should be considered.

1. Your company needs a new machine. Two companies are selling this machine in the market, their conditions are as below

Company A: The purchase of the new machine at a cost of £15,000. The purchase price includes maintenance for the first two years, but after that maintenance will cost £1,050 a year (payable at the end of each year).

The machine will have a useful life of five years, after which time it is estimated that it will have a scrap value of £4,000.

The expected income from the machine will be £1,500 at the end of the first year, £2,500 end of the second year, £3,500 end of the third year, £4,500 at the end of the fourth year, and £5,500 at the end of the fifth year.

Company B: The purchase of the new machine at a cost of £10,000. The purchase price includes maintenance for the first year, but after that maintenance will cost £1,000 a year (payable at the beginning of each year).

The machine will have a useful life of five years, after which time it is estimated that it will have a scrap value of £1,500.

The expected income from the machine will be £1000 at the end of the first year, £3000 each year at the end of the second, third and fourth years, and £5000 at the end of the fifth year

Assuming the discount rate is 4%, write a brief report advising the company on which contract will be more profitable and so whether it should accepted. Remember to take all costs and cash availability into consideration. Show any calculations you make in support of your recommendation. (14 points, no more than 500 words)

3. How confident are you about your advice and under what circumstances might it change? (5 points, no more than 100 words)

Can this be written out please, for my Bath Uni homework.

Cash Flow Analysis. You are considering a 5-year investment project which is expected to cost $1, 000, 000. In each year, you have decided that there are 3 possible states of the economy: good, average, and poor. In each individual year there is a 35% chance of the economy being good and a 15% chance of it being poor. You forecast the following net cash flows for the project:

Economy Year 1 Year 2 Year 3 Year 4 Year 5

Good 300,000 350,000 400,000 350,000 250,000

Average 250,000 275,000 325,000 275,000 175,000

Poor 200,000 225,000 250,000 225,000 150,000

(a) What is the expected net cash flow each year? You have arranged the following sources of funding:

(i) $200,000 from a 5-year fixed interest loan whose annual loan payments are $48,126.91.

(ii) $250,000 from a 5-year zero-coupon bond with a face value of $350,000.

(iii) $300,000 from an ordinary share issue where a dividend of $18,000 will be paid in one year and it is expected to grow at 3% per annum.

(iv) $250,000 from a 5-year coupon-paying bond issue whose coupon rate is 7% and face value is $250,000.

(b) what is the discount rate given above sources of financing? Hint: The discount rate should be the weighted average cost of capital.

(c) What is the NPV of this investment project and should you invest in this project?

Question 1

A company is building an amusement park and has the following projected cashflows. Costs consist of building costs and staff salaries:

5 $0 for year 5 and all future years for building costs

Staff salaries

$4,000 for year 1, increasing by a discrete step of $100 at the start of each future year, but paid continuously throughout each year, every year into the future

Revenue consists of ticket sales, merchandise sales, and food and beverage sales: Food and beverages

For all 30 years,

Tickets: $2000 per month for all years. Assume as paid at end of each month.

Merchandise: Equal to 1/3 of ticket sales

Food and beverages: $4250 per year, increasing by $50 per year in each future year. Assume the amount in each year is earned (paid) in the middle of each year.

Investors in the amusement park want to know what the Net Present Value (NPV) of this project is, assuming:

•  a risk discount rate (effective yield) of 14% per annum; and

•  a 30-year time horizon (i.e. all costs and revenues cease after 30 years).

(a) Calculate the present value of costs. Show all workings. [4 marks]

(a) Calculate the present value of revenue. Show all workings. [4 marks]

(b) Hence, calculate the NPV of the overall project. [1 mark]

Broadway Industries is considering whether to automate one phase of its production line. The automation

equipment has a six year life with no residual and will cost $890,000. Projected net cash flows are as follows:

Year 1     $ 250,000

Year 2      240,000

Year 3     210,000

Year 4   205,000

Year 5   200,000

Year 6 180,000

Requirement 1

: Compute this project’s Net Present Value (NPV) using Broadway’s 10% hurdle (required) rate. Should Broadway invest in the automation equipment?

Year                  Net Cash Flow             PV Factor from Table        Present Value

1                                                               9.

2

3

4

5

6

                                                                                                           __________

                     Present Value of Cash Inflows                                          $   948,935

                    Initial Investment

                                                                                                           _________

                   Net Present Value of the project                                          $10.

Should Broadway invest in the project? Yes or No

2. Broadway could refurbish the equipment at the end of the six years for $100,000. The

refurbished equipment could then be used one more year, providing $60,000 of net cash inflows in year 7 and the

equipment would then have a residual value of $44,000 at the end of year 7. Should Broadway plan to refurbish

the equipment after six years?

                                                           Cash (Outflow) or Inflow        PV Factor from Table            Present Value

Refurbishment at the end of 6 years (100,000)                                      .564

Cash inflows in year 7                                  60,000

Residual Value in year 7             11.________

Net Present Value of the refurbishment                                                                                           12.___________

Should Broadway invest in the refurbishment?

The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates.

Based on the pure expectations theory, is the following statement true or false?

1. The pure expectations theory assumes that investors do not consider long-term bonds to be riskier than short-term bonds.

True

False

2. The yield on a one-year Treasury security is 5.1500%, and the two-year Treasury security has a 6.9525% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)

10.0159%

11.1581%

8.7859%

7.468%

3. Recall that on a one-year Treasury security the yield is 5.1500% and 6.9525% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.45%. What is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)

8.9745%

7.8724%

9.9979%

6.6915%

4. Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market’s estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.)

6.45%

7.10%

6.69%

6.61%