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?

Revise your calculations based the new information provided below and then answer the questions that follow.

A company lends $372,000 to an owner and accepts a three year, 7% note in return. The note was issued on June 1st of the current year, and will be due on June 1st of the final year of the note.

Required:
(a) Prepare the journal entry to be made when the company makes the loan and accepts the note in return. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

• Record the 7% note receivable accepted for a loan amount of $372,000.

(b) Calculate the interest revenue to be recorded at the end of each year the note is outstanding.

(c) Prepare the journal entries to accrue the interest receivable for each year the note is outstanding. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
Dec 31

• Record the interest receivable during the period ending December 31 for year 1.
• Record the interest receivable during the period ending December 31 for Year 2.
• Record the interest receivable during the period ending December 31 for Year 3.

(d) Prepare the journal entry to record receiving the cash at the note's maturity. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
June 01

• Record the receipt of cash on account of 7% note receivable.

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.)

1. Promised to pay a fixed amount of $6,500 at the end of each year for eight years and a one-time payment of $116,000 at the end of the 8th year.
2. Established a plant remodeling fund of $490,750 to be available at the end of Year 9. A single sum that will grow to $490,750 will be deposited on January 1 of this year.
3. Agreed to pay a severance package to a discharged employee. The company will pay $75,500 at the end of the first year, $113,000 at the end of the second year, and $150,500 at the end of the third year.
4. Purchased a $172,500 machine on January 1 of this year for $34,500 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.

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

Present vaule _______

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

Amount to deposit _____

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

Intrest revenue________

3. In transaction (c), determine the present value of this obligation. (Round your answer to nearest whole dollar.)

Present vaule________

Two routes are under consideration for a new highway that will take two years to complete. The long intervalley route would be 25 miles in length and would have an initial cost of $50 million for the 1^st year and $30 million for the 2^nd year. The short transmountain route would be 10 kilometers long and would have an initial cost of $75 million for the 1st year and $50 Million for the 2^nd year. Maintenance costs are estimated at $2.5 Million per year for the long route and $1.0 Million per year for the short route for the first year. The maintenance cost is expected to rise with estimated US inflation over time. (You can estimate the inflation increase and distribution based on historical information). Based on historical information, the average US inflation rate is 3.22%. Regardless of which route is selected, the initial volume of traffic (start of 3^rd year) is expected to be 400,000 vehicles per year (normally distributed with the std dev at 20,000 vehicles). The estimated driving growth in vehicles is 2% per year starting in the 2^nd year after opening. This increase is uniformly distributed +/- 0.5%. Each option would have to be repaved every 5 years at a cost of $500,000 per mile in today’s cost (assume the same inflation rate at above). Assume a 20 year project window and an interest rate of 6%, what is the least expensive investment using NPV (Monte Carlo simulation of the cost)?

If the vehicle operating expenses are assumed to be $0.20 per mile, how might this analysis differ when considering the public benefit?

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.)

1. Borrowed $115,200 for eight years. Will pay $6,100 interest at the end of each year and repay the $115,200 at the end of the 8th year.
2. Established a plant remodeling fund of $490,150 to be available at the end of Year 9. A single sum that will grow to $490,150 will be deposited on January 1 of this year.
3. Agreed to pay a severance package to a discharged employee. The company will pay $75,100 at the end of the first year, $112,600 at the end of the second year, and $150,100 at the end of the third year.
4. Purchased a $170,500 machine on January 1 of this year for $34,100 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.

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

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

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

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

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

4-b. What is the total amount of interest expense that will be incurred?

Currently a three-year zero-coupon treasury bond is traded at a price of $70.38. The Treasury plans to issue a three-year annual coupon bond, with a coupon rate of 10%. The face value of all treasury annual coupon bonds is $100.

(a) What is the yield to maturity of the three-year zero-coupon bond?

(b) At what price should the three-year coupon bond be selling for?

(c) A bond analyst comments that without calculation, he can infer whether the bond will sell above its face value or not. How can he do this? Provide a brief explanation.

(d) If two bonds have the same term to maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price." Do you agree that this is correct? Provide a brief explanation.

(e) Lily manages a bond portfolio with the following Treasury bonds:

• 3 year zero-coupon bonds
• 3 year 10% coupon bonds
• 10 year zero-coupon bonds
• 10 year 10% coupon bonds

She believes that market interest rates are going to increase over the next several months. Accordingly, she is suggested to do the following. Comment on each suggestion and make your recommendations to Lily (e.g., whether or not to adopt the suggestion).

1. Sell the 3 year zero coupon bonds and buy the 10 year zero coupon bonds
2. Buy the 10 year zero coupon bonds and sell the 10 year 10% coupon bonds

Forecasting Cash Flow and Burn Rate

1. Create a Cash Flow Forecast on Excel using the following assumptions:
   Forecast duration: Years 0 through 5, then Exit
   Unit Sales: Sell 2000 units your first year and increase 30% per year
   Price: $100/unit first year and increase 5% per year
   COGS: Calculate based on a 75% Gross Profit Margin
   NOTE: to complete the Operating Expense section, break it into two lines: Payroll and Other
   Payroll: Start with 2 employees in year 0 paid $50,000 each; add 1 employee with every additional year, at same pay
   Other Operating Expenses: $75,000 per year starting year 0, no change over the 5 years
   Capital Expenditures: $30,000 every other year starting year 0. Assume you pay in cash, no credit
   NOTE: to complete the Working Capital section, break it into 1 line for each of the 4 components
   Increase in Accounts Receivable: Based on giving customers 60 days of credit
   Increase in Inventory: Based on keeping 3 months of Inventory on hand
   Increase in Accounts Payable: Based on your vendors giving you 30 days of credit
   Increase in Accrued Payroll: Based on paying your employees every other week
   Exit Sell company for 5x Year 5 EBITDA