A present asset (defender) has a current market value of $85,000 (year 0 dollars). Estimated market values at the end of the next three years, expressed in year 0 dollars, are MV1= $73,000, MV2 = $60,000, MV3 = $40,000. The annual expenses (expressed in year 0 dollars) are $15,000 and are expected to increase at 4.5% per year. The before-tax nominal MARR is 15% per year. The best challenger has an economic life of five years and its associated EUAC is $39,100. Market values are expected to increase at the rate of inflation which is 3% per year. Based on this information and a before-tax analysis, what are the marginal costs of the defender each year and when should you plan to replace the defender with the challenger?

You are considering the purchase of a small office building. The NOI is expected to be the following:

Year 1 = $200,000

Year 2 = $210,000

Year 3 = $220,000

Year 4 = $230,000

Year 5 = $240,000

-The property will be sold at the end of year 5.

-You believe that the property will have a terminal cap rate of 7%.

-You plan to pay all cash for the property.

-You want to earn a 10% return on investment (IRR) compounded annually.

Question #1: What property value are you projecting at the end of year 5?

Question #2: What should you pay to earn your desired IRR?

(If you can please show how to set-up & solve in excel, that would be extremely helpful. Thank you.)

Your company has been doing well, reaching $1 million in earnings, and is considering launching a new product. Designing the new product has already cost $500,000. The company estimates that it will sell 800,000 units per year for $3.00 per unit and variable non-labor costs will be $1.00 per unit. Production will end after year 3. New equipment costing $1 million will be required (at year 0). The equipment will be depreciated using 100% bonus depreciation under the 2017 TCJA (i.e. the equipment can be completely depreciated in year 1). You think the equipment will be obsolete at the end of year 3 and plan to scrap it. Your current level of working capital is $300,000. The new product will require the working capital to increase to a level of $380,000 immediately, then to $400,000 in year 1, in year 2 the level will be $350,000, and finally in year 3 the level will return to $300,000. Your tax rate is 21%. The discount rate for this project is 10%. Do the capital budgeting analysis for this project and calculate its NPV.
Note: Assume that the equipment is put into use in year 1.

Answer:
Design already happened and is  (answer either “sunk” or “initial”) cost.
According to the bonus depreciation schedule, depreciation in year 1 will be $  . (Round to the nearest dollar.)
Depreciation in years 2 and 3 will be $  . (Round to the nearest dollar.)
Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.)

(Download to Excel)

The NPV of the project is $  . (Round to the nearest dollar.)

Gustin Corp manufactures, sells, and leases medical equipment. Gustin Corp agrees to lease 3 CAT scanners, 2 MRIs, and 2 surgical Robots to Murray Hospital. The cost for Gustin to manufacture is 5,000,000. The lease term is eight years and requires eight lease payments of 1,800,000 each. Gustin expects the equipment to be worth 2,000,000 at the end of the lease but non of that amount is guaranteed by Murray hospital.

The lease begins on January 1, Year 1 and will last through December 31, Year 8. The first Lease payment of 1,800,000 is due on January 1, Year, 1 the next payment is due on December 31 year 1 and the remaining payments will continue on December 31 every year until the last one on December 31, Year 7. At the end of the lease term on December 31 Year 8 the medical equipment will be returned to Gustin Corp.

Both companies have December 31 fiscal year end. The implicit rate in the lease is 11 percent and Murray hospital is aware of that rate.

A.) Prepare journal entries for the first cash payment on January 1, year 1 for both the lessee and lessor.

B.) Provide any journal entries for the lessee and the lessor during year 1 including the second cash payment on December 31, year 1 for both the lessee and the lessor.

C .)Provide all journal entries for the lessee and the lessor during year 5.

D.) What amounts would the lessee and the lessor report on their income statement and on the balance sheet for year 5

E.) prepare all necessary entries on the books of the lessor and lessee at the termination of the lease on December 31, Year 8 assuming that the actual residual value of the equipment at the time is: A) 2,000,000 B) 3,000,000 C) 1,000,000

You are managing an all-equity firm that has 1 million shares outstanding in year 0. The firm has fixed assets with value A, which is constant over time. As the manager, you know the value of A but investors only learn it in year 3; as a result, the market price of shares in year 3 will reflect the value of A.In addition to the fixed assets firm has 1million pound of excess cash at year 0 deposited in a non interest bearing bank account and opportunity to invest 11.5 million pounds in year-2 in a project that

subsequently yields £11.9 million in year 3. Therefore, in order to invest in the project, the firm needs to raise additional funds of £10.5 million.

Your objective is to maximize the firm’s share price in year 3.

a. Assume that you can raise £10.5 million by issuing new shares at a price of £8.11 per share before making the potential investment in year 2. If the value of the firm’s fixed assets is A = £12 million, would you issue shares and invest in the project or not? What if A = £6 million?

b. Now assume that an investment banker informs you that you could use the £1 million of excess cash to repurchase shares at a price of £11.55 per share in year 1, and then raise the full £11.5 million needed to invest in the project by issuing new shares at a price of £8 per share in year 2. If the value of the firm’s existing assets A = £12 million, which of the following alternatives would you choose: (i) repurchase shares in year 1 and then do nothing in year 2, (ii) repurchase shares in year 1 and then issue new shares and invest in the project in year 2, (iii) do nothing in both years. How would your answers change if A = £6 million? What if A = £9 million?

RETURN ON INVESTMENT, MARGIN, TURNOVER

Ready Electronics is facing stiff competition from imported goods. Its operating income margin has been declining steadily for the past several years; the company has been forced to lower prices so that it can maintain its market share. The operating results for the past three years are as follows:

     Year 1                       Year 2                         Year 3

Sales                          $10,000,000              $ 9,500,000               $ 9,000,000

Operating income        1,200,000                 1,045,000                     945,000

Average assets         15,000,000              15,000,000               15,000,000

For the coming year, Ready's president plans to install a JIT purchasing and manufacturing system. She estimates that inventories will be reduced by 70 percent during the first year of operations, producing a 20 percent reduction in the average operating assets of the company, which would remain unchanged without the JIT system. She also estimates that sales and operating income will be restored to year 1 levels because of simultaneous reductions in operating expenses and selling prices. Lower selling prices will allow Ready to expand its market share.

Required:

1. Compute the ROI, margin, and turnover for years 1, 2, and 3.

2. Suppose that in year 4 the sales and operating income were achieved as expected, but inventories remained at the same level as in year 3. Compute the expected ROI, margin, and turnover. Explain why the ROI increased over the year 3 level.

3. Suppose that the sales and net operating income for year 4 remained the same as in year 3 but inventory reductions were achieved as projected. Compute the ROI, margin, and turnover. Explain why the ROI exceeded the year 3 level.

4. Assume that all expectations for year 4 were realized. Compute the expected ROI, margin, and turnover. Explain why the ROI increased over the year 3 level.

Sadik Industries must install $1 million of new machinery in its Texas plant. It can obtain a 6-year bank loan for 100% of the cost at a 14% interest rate with equal payments at the end of each year. Sadik's tax rate is 34%. The equipment falls in the MACRS 3-year class. Alternatively, a Texas investment banking firm that represents a group of investors can arrange a guideline lease calling for payments of $320,000 at the end of each year for 3 years. Under the proposed lease terms, the Sadik must pay for insurance, property taxes, and maintenance. Sadik must use the equipment if it is to continue in business, so it will almost certainly want to acquire the property at the end of the lease. If it does, then under the lease terms it can purchase the machinery at its fair market value at Year 3. The best estimate of this market value is $200,000, but it could be much higher or lower under certain circumstances. If purchased at Year 3, the used equipment would fall into the MACRS 3-year class. Sadik would actually be able to make the purchase on the last day of the year (i.e. slightly before year 3), so Sadik would get to take the first depreciation expense at Year 3(the remaining depreciation expenses would be from Year 4 through Year 6). On the time line, Sadik would show the cost of purchasing the used equipment at Year 3 and its depreciation expenses starting at Year 3. To assist management in making the proper lease-versus-buy decision, you are asked to answer the following questions: a. What is the net advantage of leasing? Should Sadik take the lease? b. Consider the $200,000 estimate residual value. How high could the residual value get before the net advantage of leasing falls to zero?

[The following information applies to the questions displayed below.]

Leach Inc. experienced the following events for the first two years of its operations:

Year 1:

1. Issued $10,000 of common stock for cash.
2. Provided $80,000 of services on account.
3. Provided $29,000 of services and received cash.
4. Collected $51,000 cash from accounts receivable.
5. Paid $20,000 of salaries expense for the year.
6. Adjusted the accounting records to reflect uncollectible accounts expense for the year. Leach estimates that 7 percent of the ending accounts receivable balance will be uncollectible.

Year 2:

1. Wrote off an uncollectible account for $2,530.
2. Provided $100,000 of services on account.
3. Provided $20,000 of services and collected cash.
4. Collected $82,000 cash from accounts receivable.
5. Paid $22,000 of salaries expense for the year.
6. Adjusted the accounts to reflect uncollectible accounts expense for the year. Leach estimates that 7 percent of the ending accounts receivable balance will be uncollectible.

Required
a. Organize the transaction data in accounts under an accounting equation. (Enter any decreases to account balances with a minus sign. Not all cells require input.)

b. Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Year 1.

c. What is the net realizable value of the accounts receivable at December 31, Year 1?

d-1. Organize the transaction data in accounts under an accounting equation for Year 2.
d-2. Prepare an income statement for Year 2.
d-3. Prepare the statement of changes in stockholders' equity for Year 2.
d-4. Prepare the balance sheet for Year 2.
d-5. Prepare the statement of cash flows for Year 2.
d-6. What is the net realizable value of the accounts receivable at December 31, Year 2?

you plan to retire in 35 years. during each year of retirement, you want to have an amount of money with the same prchaning powe that $50,000 has today. inflation is expected to be 3% per year form now.

A. how much money do you need in the first year of retiment (35 years from todya)? round to the nearest dollar.

B.  Ignore your answer to “a” and assume you need $125,000 in the first year of
retirement. Call it CF1. Note that you withdraw that money 35 years from today (t = 35). Now
assume you will keep your retirement savings (“nest egg”) in an investment that generates a
return of 4% per year, during each year of your retirement and in the year before it starts. You
plan to be retired for 27 years. You will continue to need the same purchasing power (during each
year of retirement) that $125,000 represents in the first year of retirement. Inflation will remain
at 3% per year forever. How much money do you need to have in your retirement account, one
year before your retirement starts (this helps with timing issues), to fund (or finance) this stream
of withdrawals [i.e. what is the nest egg size at t=34]? Round your final answer to the nearest
thousand dollars.

C.Ignore your answer to “b” and assume your nest egg size at [t = 34] is $5,000,000.
Also assume that you will save money in an investment that earns 7% per year until [t = 34], to
reach your goal. You will make your first savings payment (into the investment) in one year (CF1).
You will grow your annual payments by 2% per year. You will make 34 annual payments. How big
must your first savings payment be, to reach your goal?

You have the option to take out a 30-year mortgage that has an APR of 4.9% or a 20-year mortgage that has an APR of 4.15%. When answering the following questions, remember to base your mortgage payments on the amount you need to borrow rather than the entire purchase price.

30-year mortgage
If you take out a 30-year mortgage with an APR of 4.9%, what will your monthly payment be? (Round your answer to the nearest cent.)

$

If you make the payment you just calculated every month for 30 years, how much will you pay altogether?

$

What dollar amount of your total 30-year mortgage payments go to interest?

Hint: The dollar amount of your interest is the difference between your total payments and the amount you borrowed.

$

What percentage of your total 30-year mortgage payments go to interest? (Round your percentage to one decimal place.)

%

20-year mortgage
If you take out a 20-year mortgage with an APR of 4.15%, what will your monthly payment be? (Round your answer to the nearest cent.)

$

If you make the payment you just calculated every month for 20 years, how much will you pay altogether?

$

What dollar amount of your total 20-year mortgage payments go to interest?

Hint: The dollar amount of your interest is the difference between your total payments and the amount you borrowed.

$

What percentage of your total 20-year mortgage payments go to interest? (Round your percentage to one decimal place.)

%

30-year vs 20-year mortgage
How much money will you save altogether by taking out a 20-year mortgage rather than a 30-year mortgage?