Newtel Inc. manufactures Cell phones. Last year Newtel sold 30,000 phones at $80 each. Total costs amounted to $1,800,000 of which $600,000 were considered fixed.

In an attempt to improve its product, the company is considering replacing a component part that has a cost of $16 with a new and better part costing $26 per unit in the coming year. A new machine would also be needed to increase plant capacity. The machine would cost $100,000 with a useful life of five years and a $20,000 salvage value. The company uses straight-line depreciation on all plant assets. (Ignore company tax.)

Required:

1. Calculate in units, Innovation's break-even point for last year.
2. Calculate the number of units that the company would have had to sell in the last year to earn $ 200,000. Prove your answer.
3. If Newtel increases the selling price by $20, and purchases the new part and the new machine, calculate the new contribution margin , the new fixed cost & the   number of units that the company will have to sell to make the same net income as last year.

1) Summarize and discuss the benefits of the new tax policy. Who are the winners? And who are the losers? Does the new tax policy help the most vulnerable segment of our society?

2) Was the new tax policy written taking our diverse community into account? What would you do differently regarding the process of drafting the tax policy and eliminating any potential negative unintended consequences? How do you help local communities engage in policy related matters (such as tax policy) that affect their daily lives?

3) How would the government pay for the tax plan? Does the level of the U.S national debt concern you? Discuss the different views on the link between the new tax policy and national debt?

4) Discuss the impact of U.S new tax policy on developing economies? Should we care about other economies while reforming our tax policy? Explain.

5) What does the new tax policy mean to you? How do you intend to engage in economic policy matter in the future?

I am considering purchasing a new golf ball manufacturing machine. The total installed cost of this lovely piece of equipment is $2.2 million. My existing machine cost me $1 million 10 years ago, currently has no book value ($0) & a competitor will pay me $1.2 million for it before taxes but I am subject to a 40% tax rate.

            Because of this new piece of equipment, my annual sales for the next 5 years are expected to be $900,000 more than what I am currently making with my current equipment. Expenses (for the new equipment) will amount to 50% of that increased revenue. I will undergo no change in net working capital & will depreciate the new equipment using a 5 year-recovery period under MACRS. My cost of capital is 11% & there is no terminal cash flow expected.

Determine my initial investment for the new equipment

Determine my Operating cash inflows for the new equipment (consider depreciation in year 6)

What’s my payback period?

What’s the NPV?

What’s the IRR? (to the nearest whole number)

                  Assume a firm has cash of $10 and a project that is either worth $130 or $80 (50% chance of each). The firm owes $110 to the bank. Similar to the example in class, the following shows the value of assets, debt, and equity where the amounts are calculated based on expected values.

Assume the firm is considering a new project which requires an initial investment of $5. If the new project is accepted, the $5 will be paid for using the firm’s cash. The new project has a $10 cash flow in the good state (i.e., increasing the “project” cash flows in the good state from $130 to $140). In the bad state, the new project’s cash flow is -$10 (i.e., decreasing the “project” cash flows in the bad state from $80 to $70). What is the expected value of the firm’s equity if the firm decides to accept this new project?

Refer back to the facts in the previous problem. What is the expected value of the firm’s debt if the firm decides to accept this new project?

The office product division in Hulk Company reported $11,250 net operating income with $75,000 average operating assets this year. The office product division has a new investment opportunity that would increase net operating income by $4,375 with $35,000 additional investment.

(Q) Which of the following statements is TRUE given that the company's minimum required rate of return is 10%?

• If the division is evaluated on the basis of Residual income, the manager of the office product division would accept the new investment because it is good for the division.

• If the division is evaluated on the basis of ROI, the manager of the office product division would accept the new investment because it is good for the division.

• If the division is evaluated on the basis of ROI, the manager of the office product division would not accept the new investment because it is bad for the company.

• If the division is evaluated on the basis of Residual income, the manager of the office product division would not accept the new investment because it is bad for the company.

• Regardless of whether the division is evaluated on the basis of ROI or Residual income, the manager will not accept the new investment because it is bad for the company.

Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,400,000; the new one will cost $1,660,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $400,000 after five years.

The old computer is being depreciated at a rate of $280,000 per year. It will be completely written off in three years. If we don’t replace it now, we will have to replace it in two years. We can sell it now for $520,000; in two years, it will probably be worth $130,000. The new machine will save us $300,000 per year in operating costs. The tax rate is 40 percent and the discount rate is 11 percent.

Calculate the EAC for the old computer and the new computer. (Your answers should be a negative value and indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  
What is the NPV of the decision to replace the computer now?

Read the situation and using the information provided, structure two loan options for the Smiths.

Adam and Marie Smith are trading in their automobile for a new one and need an additional $8,500 for the new auto, plus $1,500 to pay off the balance on the old auto's loan.

They have the following debts:

METRO City Bank Rate Sheet

Option A:

Option B:

B Excel #1

Proposal #1 would extend trade credit to some customers that previously have been denied credit because they were considered poor risks.   Sales are projected to increase by $120,000 per year if credit is extended to these new customers. Of the new accounts receivable generated, 6% are projected to be uncollectible. Additional collection costs are projected to be 5% of incremental sales, and production and selling costs are projected to be 80% of sales. Your firm expects to pay a total of 30% of its income after expenses in taxes. (Show Work)

1. Compute the incremental income after taxes that would result from these projections:

2. Compute the incremental Return on Sales if these new credit customers are accepted:

If the receivable turnover ratio is expected to be 4 to 1 and no other asset buildup is needed to serve the new customers…

3. Compute the additional investment in Accounts Receivable
4. Compute the incremental Return on New Investment

5. If your company requires a 20% Rate of Return on Investment for all proposals, do the numbers suggest that trade credit should be extended to these new customers? Explain.