You are an employee of University Consultants, Ltd and have been given the following information. You are to present an investment analysis of a new small income-producing property for sale to a potential inventor. The asking price for the property is $8.5 million. You determine that the building was worth $7.225 million and could be depreciated over 39 years (use 1/39 per year). NOIs are estimated to be $901,375 for year 1, $900,681 for year 2, $899,962 for year 3, $943,700 for year 4, $961,855 for year 5 and expected to increase by 3.16% thereafter. A fully amortizing 70 percent loan can be obtained at 10 percent interest for 20 years (total annual payments will be monthly payments *12). The property is expected to be sold for $9,360,805 after 5 years. Capital gains from price appreciation will be taxed at 15 percent and depreciation recapture will be taxed at 25 percent. Your ordinary income will be taxed at 35 percent. Assume that there is no selling cost and equity discount rate is 13%.

a. What is mortgage loan balance by the end of year 5?

b. What is the annual interest dollar amount in year 2?

c. What is the debt service for year 4?

d. What is the first-year debt coverage ratio?

e. What is the first-year equity dividend rate?

Delizzia, a family owned business, produces and delivers potato chips to supermarkets and mom & pop stores. Located in Buenos Aires, Argentina, Delizzia is planning to expand its operations to cover other major Argentinian cities such as Cordoba and Rosario. This expansion will require Delizzia to set up a new distribution center and acquire new vehicles for last-mile distribution. Due to budget constraints, the company will only be able to expand to one city at a time. Therefore, Delizzia needs to decide if investing in Cordoba or Rosario makes more economic sense. The company is considering a time horizon of five years to make the decision. Assume the tax rate is 40% and the discount rate for Delizzia is 15%. Ignore inflation.

The table below shows the projections (incremental sales, COGS, operating expenses and depreciation) anticipated for expanding Delizzia's operations to Cordoba in millions of Argentine pesos.

Expanding to Cordoba will require an investment of 30,000,000 Argentine pesos (to be paid in Year 0) to remodel the rented space for the distribution center and purchase the vehicles. Similarly, additional working capital will be required, but it comes in the second half of Year 1 after the remodeling is finished. That is why there is no working capital in Year 0. See table below:

Note.- A negative number for the capital expenditure and working capital represents a cash outflow. The positive working capital cash flow in the final period may not equal the sum of the previous investments due to accounting assumptions, such as not collecting all receivables.

The company uses straight-line depreciation over 5 years. The terminal value is zero.

What are the projected Free Cash Flows for year 5 associated with expanding to Cordoba?

Part 1

The table below shows the projections (incremental sales, COGS, operating expenses and depreciation) anticipated for expanding Delizzia's operations to Rosario in millions of Argentine pesos.

They company uses straight-line depreciation over 5 years. Assume terminal value of zero.

Calculate the projected NOPAT (Net Operating Profit After Tax) for years 1-5.

What would be the projected NOPAT for year 1 associated with expanding to Rosario?

What would be the projected NOPAT for year 2 associated with expanding to Rosario?

What would be the projected NOPAT for year 3 associated with expanding to Rosario?

What would be the projected NOPAT for year 4 associated with expanding to Rosario?

What would be the projected NOPAT for year 5 associated with expanding to Rosario?

Part 2

Expanding to Rosario will require an investment of 50,000,000 Argentine pesos (to be paid in Year 0) to remodel the rented space for the distribution center and purchase the vehicles. Similarly, additional working capital will be required, but it comes in the second half of Year 1 after the remodeling is finished. That is why there is no working capital in Year 0. See table below:

Note.- A negative number for the capital expenditure and working capital represents a cash outflow. The positive working capital cash flow in the final period may not equal the sum of the previous investments due to accounting assumptions, such as not collecting all receivables.

Calculate the projected Free Cash Flows immediately and for years 1-5.

What are the projected Free Cash Flows immediately associated with expanding to Rosario?

What are the projected Free Cash Flows for year 1 associated with expanding to Rosario?

What are the projected Free Cash Flows for year 2 associated with expanding to Rosario?

What are the projected Free Cash Flows for year 3 associated with expanding to Rosario?

What are the projected Free Cash Flows for year 4 associated with expanding to Rosario?

What are the projected Free Cash Flows for year 5 associated with expanding to Rosario?

Shisman Designs is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? WACC: 8.00%

Cash flows Year 0: -$650 Year 1: $400 Year 2: $600 Year 3: $600

Please type answer

Calculate the Pay-off Period for an IS project that has a $200,000 development cost in year 1 and annual $40,000 maintenance costs from year 2 onwards. The benefits are expected to be $100,000 in Year 2 and growing $25,000 a year as adoption of the system increases. The discount rate is 0%.

Required information

Chapter 7: Applying Excel

Step 1: Download the Applying Excel form located on the left-hand side, under files.

Step 2: Then enter formulas in all cells that contain question marks. For example, in cell B26 enter the formula "= B17".

Step 3: Check your worksheet by changing the units sold in the Data to 6,000 for Year 2. The cost of goods sold under absorption costing for Year 2 should now be $240,000. If it isn’t, check cell C41. The formula in this cell should be =IF(C26<C27,C26*C36+(C27-C26)*B36,C27*C36).]

If your worksheet is operating properly, the net operating income under both absorption costing and variable costing should be $(34,000) for Year 2. That is, the loss in Year 2 is $34,000 under both methods. If you do not get these answers, find the errors in your worksheet and correct them. Assume that the units produced in year 2 were sold first.

Step 4: Proceed to the requirements below only after completing your worksheet as it will be used to answer the following questions.

The LIFO inventory flow assumption is used throughout the problem.

Chapter 7: Applying Excel: Exercise

2. Change all of the numbers in the data area of your worksheet so that it looks like this:

Problem 6-25 Prepare and Interpret Income Statements; Changes in Both Sales and Production; Lean Production [LO6-1, LO6-2, LO6-3] Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Year 1 Year 2 Year 3 Sales $ 1,000,000 $ 800,000 $ 1,000,000 Cost of goods sold 740,000 520,000 785,000 Gross margin 260,000 280,000 215,000 Selling and administrative expenses 230,000 200,000 230,000 Net operating income (loss) $ 30,000 $ 60,000 $ (15,000 ) In the latter part of Year 2, a competitor went out of business and in the process dumped a large number of units on the market. As a result, Starfax’s sales dropped by 20% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 50,000 units; the increased production was designed to provide the company with a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that it had excess inventory and that spurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below: Year 1 Year 2 Year 3 Production in units 50,000 60,000 40,000 Sales in units 50,000 40,000 50,000 Additional information about the company follows: The company’s plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $4.00 per unit, and fixed manufacturing overhead expenses total $540,000 per year. A new fixed manufacturing overhead rate is computed each year based that year's actual fixed manufacturing overhead costs divided by the actual number of units produced. Variable selling and administrative expenses were $3 per unit sold in each year. Fixed selling and administrative expenses totaled $80,000 per year. The company uses a FIFO inventory flow assumption. (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first.) Starfax’s management can’t understand why profits doubled during Year 2 when sales dropped by 20% and why a loss was incurred during Year 3 when sales recovered to previous levels. Required: 1. Prepare a contribution format variable costing income statement for each year. 2. Refer to the absorption costing income statements above. a. Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how much is fixed. b. Reconcile the variable costing and absorption costing net operating income figures for each year. 5b. If Lean Production had been used during Year 2 and Year 3, what would the company’s net operating income (or loss) have been in each year under absorption costing?

Problem 6-25 Prepare and Interpret Income Statements; Changes in Both Sales and Production; Lean Production [LO6-1, LO6-2, LO6-3]

Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis):

In the latter part of Year 2, a competitor went out of business and in the process dumped a large number of units on the market. As a result, Starfax’s sales dropped by 20% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 50,000 units; the increased production was designed to provide the company with a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that it had excess inventory and that spurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below:

Additional information about the company follows:

1. The company’s plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $6.00 per unit, and fixed manufacturing overhead expenses total $450,000 per year.

2. A new fixed manufacturing overhead rate is computed each year based that year's actual fixed manufacturing overhead costs divided by the actual number of units produced.

3. Variable selling and administrative expenses were $3 per unit sold in each year. Fixed selling and administrative expenses totaled $80,000 per year.

4. The company uses a FIFO inventory flow assumption. (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first.)

Starfax’s management can’t understand why profits doubled during Year 2 when sales dropped by 20% and why a loss was incurred during Year 3 when sales recovered to previous levels.

Required:

1. Prepare a contribution format variable costing income statement for each year.

2. Refer to the absorption costing income statements above.

a. Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how much is fixed.

b. Reconcile the variable costing and absorption costing net operating income figures for each year.

5b. If Lean Production had been used during Year 2 and Year 3, what would the company’s net operating income (or loss) have been in each year under absorption costing?

Cuneo Company’s income statements for the last 3 years are as follows:

Labels and Amount Descriptions

Refer to the list below for the exact wording of an account title within your income statement.

Common-Size Income Statement

1. Prepare a common-size income statement for Year 2 by expressing each line item for Year 2 as a percentage of that same line item from Year 1. (Note: Enter all amounts as positive numbers. Round answers to the nearest tenth of a percent. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries.)

2. Prepare a common-size income statement for Year 3 by expressing each line item for Year 3 as a percentage of that same line item from Year 1. (Note: Enter all amounts as positive numbers. Round answers to the nearest tenth of a percent. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries.)