This project involves a new type of widget. We think we can sell 6,000 units of the widget per year at a price of $950 each. Variable costs will run about $400 per unit and the product should have a four-year life.
Fixed Costs for the project will run $450,000 per year and we will need to invest a total of $1,200,000 in manufacturing equipment. The equipment will be depicted using MACRS over seven years. In year four, the equipment will be worth half of what we paid for it.
We will invest $1,150,000 in net working capital at the start. After that, net working capital requirements will be 25% of sales. Assume a 34% tax rate.
MACRS Table:
Year 1 = 14.29%
Year 2 = 24.49%
Year 3 = 17.49%
Year 4 = 12.49%
Should we undertake the project?
HINT: Prepare a pro forma income statement for each year. Then calculate OCF. Draw this on a timeline then calculate NPV assuming a 28% required return. Show work using Excel.
In: Finance
A machine can be purchased for $222,000 and used for five years,
yielding the following net incomes. In projecting net incomes,
double-declining depreciation is applied using a five-year life and
a zero salvage value.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | ||||||||||||||||
| Net income | $ | 19,000 | $ | 49,000 | $ | 59,000 | $ | 57,500 | $ | 105,000 | ||||||||||
Compute the machine’s payback period (ignore taxes). (Round
payback period answer to 3 decimal places.)
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In: Accounting
You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease the equipment to you for $ 10 comma 500 per year if you sign a guaranteed 5-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed below (the equipment has an economic life of 5 years). If your discount rate is 6.7 %, what should you do? Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 negative $ 40 comma 800 negative $ 2 comma 000 negative $ 2 comma 000 negative $ 2 comma 000 negative $ 2 comma 000 negative $ 2 comma 000 The net present value of the leasing alternative is $ nothing. (Round to the nearest dollar.)
In: Finance
XYZ is a company located in Italy, the company manufactures machine parts. It is currently involved in making a decision concerning the acquisition of new machining tool. Two different versions of the tool are available: X AND Y. The forecasted cash flows of the two alternative are listed below; XYZ normally uses payback with a 3-year criterion. NET CASH FLOWS ($000s) Tool X Year 0 -1000, Year 1 +400, Year 2 +600, Year 3 +187, Tool Y Year 0 -450, Year 1+300, Year 2+150, Year 3+106. XYZ faces a perfect capital market, in which the interest rate for the projects' risk level is 5%. Required: (a) Using the Payback and the IRR decisions rule, indicate which projects the company should accept and state clearly the reasons for your decisions. (b) How would your conclusions in (a) will change if the projects were mutually exclusive? (c) State clearly any limitations and assumptions that you made in your calculations.
In: Finance
What is the present value of $5,000 received:
a. Twenty years from today when the interest rate is 8% per year?
b.Ten years from today when the interest rate is 8% per year?
c.Five years from today when the interest rate is 8% per year?
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a. Twenty years from today when the interest rate is 8% per year?The present value of $5,000 received 20 years from today when the interest rate is 8% per year is $____. (Round to the nearest dollar.)
b.Ten years from today when the interest rate is 8% per year? The present value of $5,000 received 10 years from today when the interest rate is 8% per year is $______. (Round to the nearest dollar.)
c. Five years from today when the interest rate is 8% per year? The present value of $5,000 received 5 years from today when the interest rate is 8% per year is $____.(Round to the nearest dollar.)
In: Finance
Dividends Per Share
Seventy-Two Inc., a developer of radiology equipment, has Shares of ownership of a corporation.stock outstanding as follows: 70,000 shares of cumulative preferred 3% stock, $20 A dollar amount assigned to each share of stock.par, and 410,000 shares of $25 par common.
During its first four years of operations, the following amounts were distributed as dividends: first year, $31,000; second year, $76,000; third year, $100,000; fourth year, $110,000.
Calculate the dividends per share on each class of stock for each of the four years. Round all answers to two decimal places. If no dividends are paid in a given year, enter "0.00".
| 1st Year | 2nd Year | 3rd Year | 4th Year | |
| A class of stock with preferential rights over common stock.Preferred stock (dividends per share) | $ | $ | $ | $ |
| The stock outstanding when a corporation has issued only one class of stock.Common stock (dividends per share) | $ | $ | $ | $ |
Feedback
In: Accounting
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Edison Corporation needs to raise funds to finance a plant expansion and has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 8 percent. Assume a par value of $1,000 and semiannual compounding. |
| a. | What will these bonds sell for at issuance? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| b. |
Using the IRS amortization rule, what interest deduction can the company take on these bonds in the first year? In the last year? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
| c. |
Using the straight-line method, what interest deduction can the company take on these bonds in the first year? In the last year?. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
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In: Finance
5. Jasper Corp, has the following Stockholders’ Equity account balances and activity for Year 2.
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Net income |
$14,750,000 |
|||
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Retained earnings |
$13,250,000 |
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Preferred stock shares outstanding |
1,000 |
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Common stock shares outstanding at January 1, Year 2 |
6,855,000 |
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Additional Common shares issued at July 1, Year 2 |
20,000 |
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3-for-1 stock split at December 31, Year 2 |
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Preferred Dividends |
$15,000 |
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Common Dividends |
$58,000 |
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Year 1 EPS |
$2.06 |
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Earnings per share = __________________ / ___________________* = ________
* Compute Denominator: Weighted average common shares outstanding
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Date |
Shares |
Portion of year |
Weighted Average Shares |
|
January 1, Y2 |
6,855,000 |
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July 1, Y2 |
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Weighted Average December 31 before split |
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Stock split 3-for-1 |
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*Total Weighted Average, 12/31/Y2 |
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Note: Year 1 restated |
$2.06 / 3 =_____ |
Did performance improve in Year 2 as compared to Year 1? _________________Why?
In: Accounting
Suppose that you work for a U.S. senator who is contemplating writing a bill that would put a national sales tax in place. Because the tax would be levied on the sales revenue of retail stores, the senator has asked you to prepare a forecast of retail store sales for year 8, based on data from year 1 through year 7. The data are:
| (c1p8) | Year | Retail Store Sales |
| 1 | $ 1,225 | |
| 2 | 1,285 | |
| 3 | 1,359 | |
| 4 | 1,392 | |
| 5 | 1,443 | |
| 6 | 1,474 | |
| 7 | 1,467 |
Use the naive forecasting model presented in this chapter to prepare a forecast of retail store sales for each year from 2 through 8.
Prepare a time-series graph of the actual and forecast values of retail store sales for the entire period. (You will not have a forecast for year 1 or an actual value for year 8.)
Calculate the MAPE for your forecast series using the values for year 2 through year 7. (please show how to plug in Excel)
In: Finance
Estimate Cash flows of the three-year project by filling in the values in the table below. · Equipment will cost $40,000, Shipping and installation charges for the equipment are expected to total $5,000. ·The Machine is depreciated using straight line method to a value of $0 at the end of it's life. ·Net working capital is $10,000 initially and $5,000 in year 1. All investment in net working capital is recovered back at the end of the project ·Total revenues will be $50,000 in year 1, $60,000 in year 2 and $75,000 in year 3. ·Operating costs = $25,000 during the first year and increase at a rate of 6 percent per year over the 3-year project ·Marginal tax rate is 40 percent. Cost of capital = 10%
| Year | 0 | 1 | 2 | 3 |
|
Revenue |
||||
| -Operating Cost | ||||
| - Depreciation | ||||
| Operating Earnings Before Taxes | ||||
| - Taxes (40%) | ||||
| Operating Earnings After taxes | ||||
| + Depreciation | ||||
| - Change in Net working Capital | ||||
| - Initial Investment in Machinery | ||||
| Net Cash Flows |
In: Finance