Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $27.00 million. The plant and equipment will be depreciated over 10 years to a book value of $2.00 million, and sold for that amount in year 10. Net working capital will increase by $1.34 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.96 million per year and cost $1.64 million per year over the 10-year life of the project. Marketing estimates 19.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 28.00%. The WACC is 14.00%. Find the IRR (internal rate of return).

Answer Format: Percentage Round to: 4 decimal places (Example: 9.2434%, % sign required. Will accept decimal format rounded to 6 decimal places (ex: 0.092434))

Q1.Whitson Co. is looking for ways to shorten its cash conversion cycle. It has annual sales of $45,625,000, or $125,000 a day on a 365-day basis. The firm's cost of goods sold is 80% of sales. On average, the company has $7,500,000 in inventory, $5,750,000 in accounts receivable, and $2,750,000 in accounts payable. Its CFO has proposed new policies that would result in a 25% reduction in both average inventories and accounts receivable, and a 10% increase in average accounts payable. She also anticipates that these policies would reduce sales by 5%.  What effect would these policies have on the company's cash conversion cycle?  

Q2.Newsome Inc. buys on terms of 4/10, net 45. It does not take the discount, and it generally pays after 65 days. What is the effective (not nominal) annual percentage cost of its non-free trade credit, based on a 365-day year?  

You are considering buying a vehicle to use in your daily errands. A used vehicle will cost EGP85,000 and have a EGP20,000 market (salvage) value after a 5 years useful life, and consumes 2 liters of fuel per 10 km travelled. A new vehicle will cost EGP130,000 and have a EGP40,000 market value after a 6 years useful life. The new vehicle is expected to reduce fuel consumption compared with the used vehicle. You expect to drive the vehicle 18,000 km per year. Fuel costs EGP8/liter and the interest rate is 15% per year.

a) If the new vehicle is expected to reduce fuel consumption by 10% compared with

the used vehicle, which vehicle should you buy?

b) What is the percent reduction in the fuel consumption by the new vehicle that

would reverse the decision you made in part (a)?

c) Determine the percentage change in the salvage value of the new vehicle that

would reverse the decision made in part(a)?

Consolidated Inc. uses a weighted average cost of capital of 12% to evaluate average-risk projects and adds/subtracts two percentage points to evaluate projects of greater/lesser risk. Currently, two mutually exclusive projects are under consideration. Both have a cost of $200,000 and last four years. Project A, which is riskier than average, will produce annual after-tax cash flows of $71,000. Project B, which has less-than-average risk, will produce after-tax cash flows of $146,000 in Years 3 and 4 only. What should Consolidated do?

I need the NPV of this project. Tax Rate is 40% and the WACC is 11.49%

This project requires an initial investment of $2,000,000 in equipment which will cost an additional $250,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $100,000. The project will last 6 years at which time the market value for the equipment will be $30,000.

The project will project a product with a sales price of $120.00 per unit and the variable cost per unit will be $65.00. The fixed costs would be $500,000 per year. Because this project is very different to current products sold by the business, management has imposed a 2 percentage point premium above its current WACC as the valuation hurdle it must meet or surpass.

Years 2014 2015 2016 2017 2018 2019 Forecasted Units Sold 21,000 55,000 44,000 28,000 25,000 11,000

Approximately Relevant ABC

Reducir, Inc., produces two different types of hydraulic cylinders. Reducir produces a major subassembly for the cylinders in the Cutting and Welding Department. Other parts and the subassembly are then assembled in the Assembly Department. The activities, expected costs, and drivers associated with these two manufacturing processes are given below.

Other overhead activities, their costs, and drivers are listed below.

Other production information concerning the two hydraulic cylinders is also provided:

Other overhead activities:.

The per unit overhead cost using the 14 activity-based drivers is $1,108 and $779 for Cylinder A and Cylinder B, respectively.

Required:

1. Determine the percentage of total costs represented by the three most expensive activities.

85%

2. If required, round your interim calculations and final answers to the nearest dollar.
Allocate the costs of all other activities to the three activities identified in Requirement 1 in proportion to their individual activity costs.

Calculate the total activity costs of all the three activities.

Now assign these total costs to the products using the drivers of the three chosen activities.

3. Using the costs assigned in Requirement 2, calculate the percentage error using the ABC costs as a benchmark. Round your answers to one decimal place. If an item is negative, use a minus (-) sign to indicate.

Approximately Relevant ABC

Reducir, Inc., produces two different types of hydraulic cylinders. Reducir produces a major subassembly for the cylinders in the Cutting and Welding Department. Other parts and the subassembly are then assembled in the Assembly Department. The activities, expected costs, and drivers associated with these two manufacturing processes are given below.

Other overhead activities, their costs, and drivers are listed below.

Other production information concerning the two hydraulic cylinders is also provided:

Other overhead activities:.

The per unit overhead cost using the 14 activity-based drivers is $1,108 and $779 for Cylinder A and Cylinder B, respectively.

Required:

1. Determine the percentage of total costs represented by the three most expensive activities.

%

2. If required, round your interim calculations and final answers to the nearest dollar.
Allocate the costs of all other activities to the three activities identified in Requirement 1 in proportion to their individual activity costs.

Calculate the total activity costs of all the three activities.

Now assign these total costs to the products using the drivers of the three chosen activities.

3. Using the costs assigned in Requirement 2, calculate the percentage error using the ABC costs as a benchmark. Round your answers to one decimal place. If an item is negative, use a minus (-) sign to indicate.

Approximately Relevant ABC

Reducir, Inc., produces two different types of hydraulic cylinders. Reducir produces a major subassembly for the cylinders in the Cutting and Welding Department. Other parts and the subassembly are then assembled in the Assembly Department. The activities, expected costs, and drivers associated with these two manufacturing processes are given below.

Other overhead activities, their costs, and drivers are listed below.

Other production information concerning the two hydraulic cylinders is also provided:

Other overhead activities:.

The per unit overhead cost using the 14 activity-based drivers is $1,108 and $779 for Cylinder A and Cylinder B, respectively.

Required:

1. Determine the percentage of total costs represented by the three most expensive activities.

%

2. If required, round your interim calculations and final answers to the nearest dollar.
Allocate the costs of all other activities to the three activities identified in Requirement 1 in proportion to their individual activity costs.

Calculate the total activity costs of all the three activities.

Now assign these total costs to the products using the drivers of the three chosen activities.

3. Using the costs assigned in Requirement 2, calculate the percentage error using the ABC costs as a benchmark. Round your answers to one decimal place. If an item is negative, use a minus (-) sign to indicate.

A home owner has a utility function of U (m) = √m, where m is income. The home owner is considering buying flood insurance because they live near a river that has flooded in the past. If it is a dry year, she will have an income of $60,000 to spend on other things. If it is a rainy year and there is a flood, then she has to pay for repairs to her house. Then her income will only be $20,000 to spend on non-flood costs. The probability of a flood based on historical data is 4%.

(a) (a) If the home owner can buy insurance for a premium of $0.04 per dollar of coverage, how large of an insurance policy should the homeowner buy? Set up the expected utility maximization problem and solve for K, the optimal insurance policy size.

(b) Now suppose we do not know the cost of the insurance policy. But you now know that in the event of a flood, that the insurance policy will pay you 75% of damages. What is the maximum amount the homeowner would be willing to pay for such an insurance policy?

(c) Explain in words how to generally calculate expected utility. What information do you need? What terms do you multiply versus add? Be clear in your explanation.

V & T Faces, Inc., would like to open a retail store in Miami. The initial investment to purchase the building is $420,000, and an additional $50,000 in working capital is required. Since this store will be operating for many years, the working capital will not be returned in the near future. V & T Faces expects to remodel the store at the end of 3 years at a cost of $100,000. Annual net cash receipts from daily operations (cash receipts minus cash payments) are expected to be as follows:

Year 1 $80,000

Year 2 $115,000

Year 3 $118,000

Year 4 $140,000

Year 5 $155,000

Year 6 $167,000

Year 7 $175,000

The company’s required rate of return is 13 percent.

Assume management decided to limit the analysis to 7 years.

Questions:

1) What is the weakness of using the payback period method to evaluate long-term investments?

2)Assume the manager of the company wanted to live in Miami and intentionally inflated the projected annual cash receipts so that the proposal would be accepted. The proposal would otherwise have been rejected. Explain how the company’s use of a post audit would help to prevent this type of unethical behavior.