On October 1, Year 6, Wheeling Company contracted to sell merchandise to a customer in Switzerland at a selling price of CHF422,000. The contract called for the merchandise to be delivered to the customer on January 31, Year 7, with payment due on delivery. On October 1, Year 6, Wheeling arranged a forward contract to deliver CHF422,000 on January 31, Year 7, at a rate of CHF1 = $1.23. Wheeling's’s year-end is December 31.

The merchandise was delivered on January 31, Year 7, and CHF422,000 were received and delivered to the bank.

Exchange rates were as follows:

**For contracts expiring on January 31, Year 7.

Required:

(a) Prepare the journal entries (using net method) that Wheeling should make to record the events described assuming that the forward contract is designated as a cash flow hedge. For Exchange Gains/Losses - OCI account, just use OCI, and the credit or debit will determine if it is a gain/loss

(b) Prepare a partial trial balance of the accounts used as at December 31, Year 6

(c) Prepare the journal entries (using net method) that Wheeling should make to record the events described, assuming that the forward contract is designated as a fair value hedge.

(d) Prepare a partial trial balance of the accounts used as at December 31, Year 6.

On October 1, Year 6, Wheeling Company contracted to sell merchandise to a customer in Switzerland at a selling price of CHF422,000. The contract called for the merchandise to be delivered to the customer on January 31, Year 7, with payment due on delivery. On October 1, Year 6, Wheeling arranged a forward contract to deliver CHF422,000 on January 31, Year 7, at a rate of CHF1 = $1.23. Wheeling's’s year-end is December 31.

The merchandise was delivered on January 31, Year 7, and CHF422,000 were received and delivered to the bank.

Exchange rates were as follows:

**For contracts expiring on January 31, Year 7.

Required:

(a) Prepare the journal entries (using net method) that Wheeling should make to record the events described assuming that the forward contract is designated as a cash flow hedge. For Exchange Gains/Losses - OCI account, just use OCI, and the credit or debit will determine if it is a gain/loss

(b) Prepare a partial trial balance of the accounts used as at December 31, Year 6.

(c) Prepare the journal entries (using net method) that Wheeling should make to record the events described, assuming that the forward contract is designated as a fair value hedge.

(d) Prepare a partial trial balance of the accounts used as at December 31, Year 6.

1. Home Co, a US company making small kitchen appliances, imports plastics from Mexico. Home Co makes an order for next year for plastics, for which it will have to make a payment of MXN150 mn in 1 year. Casa’s finance manager is worried about Mexican Pesos (MXP) because it can be very volatile due to problems in the economy, so he decides to hedge the payable.

He talks to the banks and collects the following information on potential hedging possibilities:

1-year borrowing rate in US$= 3%

1-year deposit rate in US$=1%

1-year borrowing rate in MXN=6%

1-year deposit rate in MXN=4%

Spot rate of MXN= $0.045

1-year forward rate of USMXN=$0.05

Future spot rate of MXN (1-year later)= $0.03 with 70% probability

Future spot rate of MXN (1-year later)=$0.04 with 20% probability

Future spot rate of MXN (1-year later)=$0.05 with 10% probability

Strike price of a 1-year call option = $0.04, premium = $0.005 (per dollar)

Strike price of a 1-year put option = $0.05 , premium= $0.005 (per dollar)

1. By using the relevant information above, calculate the cost of hedging for each of the 3 methods (forward hedge, money market hedge or option hedge) to Casa Co. Which one should the company use, why? (15 points)
2. Would Casa be better off if it did not make the hedge? (5 points)

Kemmerer Pen, a manufacturer of stationary, is considering a new investment that
requires the use of an existing warehouse, which the firm acquired four years ago for $2
million but is currently redundant (unused).
• The warehouse’s market rental price is $200,000 (pre-tax) per year at year zero.
• Rental price for the warehouse will increase at a growth rate of 5% from year 1 to
year 5.
• In addition to using the warehouse, the project requires an up-front investment into
machines and other equipment of $6 million. This investment can be fully
depreciated straight-line over the next six years for tax purposes with a salvage
value of 0.
• However, the company expects to terminate the project at the end of five years and
to sell the machines and equipment for $1.5 million.
• The project requires an initial investment (incur at Year 0) into net working capital
equal to 5% of predicted first-year sales. Subsequently, net working capital is 5%
of the predicted sales over the following year but will be fully recovered at the
end of year 5.
• Sales of pens are expected to be $5 million in the first year and to stay stable for
five years. Total manufacturing costs and operating expenses (excluding
depreciation) are 60% of sales. And profits are taxed at 30%.

a) What are the free cash flows of the project from Year 0 to Year 5 respectively? (6
marks). If the cost of capital is 10%, what is the NPV of the project?

b) If a borrowing interest payment of $600,000 for this project is made per year
during the investing period, will it change Kemmerer Pen’s investment decision?

KK Enterprises is evaluating a project with the following characteristics:

1. Fixed capital investment is $2,000,000.
2. The project has an expected six-year life.
3. The initial investment in net working capital is $200,000. At the end of each year, net working capital must be increased so that the cumulative investment in net working capital is one-sixth of the next year’s projected sales.
4. The fixed capital is depreciated 30 percent in year 1, 35 percent in year 2, 20 percent in year 3, 10 percent in year 4, 5 percent in year 5, and 0 percent in year 6.
5. Sales are $1,200,000 in year 1. They grow at a 25 percent annual rate for the next two years, and then grow at a 10 percent annual rate for the last three years.
6. Fixed cash operating expenses are $150,000 for years 1–3 and $130,000 for years 4–6.
7. Variable cash operating expenses are 40 percent of sales in year 1, 39 percent of sales in year 2, and 38 percent in years 3–6.
8. KK’s marginal tax rate is 30 percent.
9. KK will sell its fixed capital investments for $150,000 when the project terminates and recapture its cumulative investment in net working capital. Income taxes will be paid on any gains.
10. The project’s required rate of return is 12 percent.
11. If taxable income on the project is negative in any year, the loss will offset gains elsewhere in the corporation, resulting in a tax savings.

REQUIRED:

1. Determine whether this is a profitable investment using
   1. NPV
   2. IRR

On January 1, Boston Company completed the following transactions (use a 7% annual interest rate for all transactions): (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) Promised to pay a fixed amount of $7,200 at the end of each year for seven years and a one-time payment of $117,400 at the end of the 7th year. Established a plant remodeling fund of $491,800 to be available at the end of Year 8. A single sum that will grow to $491,800 will be deposited on January 1 of this year. Agreed to pay a severance package to a discharged employee. The company will pay $76,200 at the end of the first year, $113,700 at the end of the second year, and $151,200 at the end of the third year. Purchased a $176,000 machine on January 1 of this year for $35,200 cash. A five-year note is signed for the balance. The note will be paid in five equal year-end payments starting on December 31 of this year.

a.) In transaction (a), determine the present value of the debt. (Round your answer to nearest whole dollar.)

b.) In transaction (b), what single sum amount must the company deposit on January 1 of this year? (Round your answer to nearest whole dollar.)

What is the total amount of interest revenue that will be earned? (Round your answer to nearest whole dollar.)

c.) In transaction (c), determine the present value of this obligation.

d.) In transaction (d), what is the amount of each of the equal annual payments that will be paid on the note?

What is the total amount of interest expense that will be incurred?

Thank you in advance!

8. Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.052 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $159,600. The project requires an initial investment in net working capital of $228,000. The project is estimated to generate $1,824,000 in annual sales, with costs of $729,600. The tax rate is 23 percent and the required return on the project is 13 percent.

What is the project's Year 0 net cash flow?

What is the project's Year 1 net cash flow?

What is the project's Year 2 net cash flow?

9. Quad Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.0 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $155,400 after 3 years. The project requires an initial investment in net working capital of $222,000. The project is estimated to generate $1,776,000 in annual sales, with costs of $710,400. The tax rate is 24 percent and the required return on the project is 8 percent.

What is the project's year 0 net cash flow?

What is the project's year 1 net cash flow?

What is the project's year 2 net cash flow?

What is the project's year 3 net cash flow?

What is the NPV?

X Company is considering the replacement of an existing machine. The new machine costs $1.8 million and requires installation costs of $250,000. The existing machine can be sold currently for $125,000 before taxes. The existing machine is 3 years old, cost $1 million when purchased, and has a $290,000 book value and a remaining useful life of 5 years. It was being depreciated under MACRS using a 5-year recovery period. If it is held for 5 more years, the machine's market value at the end of year 5 will be zero. Over its 5-year life, the new machine should reduce operating costs by $650,000 per year, and will be depreciated under MACRS using a 5-year recovery period. The new machine can be sold for $150,000 net of removal and cleanup costs at the end of 5 years. A $30,000 increase in net working capital will be required to support operations if the new machine is acquired. The firm has adequate operations against which to deduct any losses experienced on the sale of the existing machine. The firm has a 15% cost of capital, is subject to a 40% tax rate and requires a 42-month payback period for major capital projects.

5-Year MACRS

Year 1 20%

Year 2  32%

Year 3 19%

Year 4 12%

Year 5 12%

Year 6 5%

1. Should they accept or reject the proposal to replace the machine?

2. What is the NPV?

3. What is the IRR?

4. What is the payback period?

lIn Year 1, Jeff and Kim Jenson (married filing a joint return) have $200,000 of taxable income before considering the following transactions:

a. On March 2, Year 1, they sold a painting (art) for $100,000 that was purchased 15 years ago for $90,000.

b. A $12,000 loss on 11/1, Year 1 sale of bonds (acquired on 5/12, 5 years ago);

c. A $4,000 gain on 12/12, Year 1 sale of IBM stock (acquired on 2/5, Year 1);

d. A $17,000 gain on the 10/17, Year 1 sale of rental property. Of the $17,000 gain, $8,000 is reportable as gain subject to the 25% maximum rate and the remaining $9,000 is subject to the 15% maximum rate (the property was acquired on 8/2, 6 years ago. The acquiring date was after 1986);

e. A $12,000 loss on 12/20, Year 1 sale of bonds (acquired on 1/18, Year 1);

f. A $7,000 gain on 8/27, Year 1 sale of BH stock (acquired on 7/30, 10 years ago); and

g. A $11,000 loss on 6/14, Year 1 sale of QuikCo. Stock (acquired on 3/20, 5 years ago).

1) What is the amount and character of each transaction?

2) Complete the required netting procedures and calculate the Jenson's Year 1 taxable income after considering the above transactions.

3). What is Jenson’s Year 1 additional tax liability as a result of the above transactions?

X Company is considering the replacement of an existing machine. The new machine costs $1.8 million and requires installation costs of $250,000. The existing machine can be sold currently for $125,000 before taxes. The existing machine is 3 years old, cost $1 million when purchased, and has a $290,000 book value and a remaining useful life of 5 years. It was being depreciated under MACRS using a 5-year recovery period. If it is held for 5 more years, the machine’s market value at the end of year 5 will be zero. Over its 5-year life, the new machine should reduce operating costs by $650,000 per year, and will be depreciated under MACRS using a 5-year recovery period. The new machine can be sold for $150,000 net of removal and cleanup costs at the end of 5 years. A $30,000 increase in net working capital will be required to support operations if the new machine is acquired. The firm has adequate operations against which to deduct any losses experienced on the sale of the existing machine. The firm has a 15% cost of capital, is subject to a 40% tax rate and requires a 42-month payback period for major capital projects.

5-Year MACRS

Year 120%

Year 232%

Year 319%

Year 412%

Year 512%

Year 65%

1. Should they accept or reject the proposal to replace the machine?

2. What is the NPV?

3. What is the IRR?

4. What is the payback period?