Question 1

   

Score

0

 

Awesome Gadget, INC is considering making an additional investment of in its production capabilities.  It has collected data on the current year's (year 0) revenue, costs and quantity sold. 

 

The price per unit  will be decreased 10% annually (year-1 unit price will be 10% less than the present (year 0) price, etc.)

 

COGS per unit produced is forecast to decrease 5% annually (cost per unit in year-1 will be 5% less than the present unit cost, etc.)

 

Fixed costs will increase due to a new salaried technician in all years. No other change is forecast for S.G.& A. Depreciation and working capital for each year are to be as shown in the data block.

 

Using this data, prepare a three year proposal income statement (only) for years 1-3 using items from the following data block as needed.  The income statement must be in the standard accounting sequence and contain appropriate subtotals and totals.

 

Years

0

1

2

3

 
 

Unit Price

$199.00

179.1

161.19

145.071

 
 

Annual % price decrease

10.00%

    
 

Unit COGS

$107.50

102.125

97.01875

92.1678125

 
 

Annual % COGS decrease

5.00%

    
 

New salaried technician

 

$100,000

$110,000

$120,000

 
 

Investment

$350,000

    
 

Forecasted sales quantities

 

340,000

540,000

1,000,000

 
 

Working capital

$750,000

$775,000

$725,000

$675,000

 
 

Depreciation

 

$510,000

$460,000

$400,000

 
 

Income Tax rate

14.00%

    
 

Capital Gains tax rate

10.50%

    
 

MARR

20.00%

    

 

Question 2

   

Score

0

An investment committee has narrowed down their investment decision to three proposals.  Further information was collected on these three proposals and the investment amounts, estimated annual cash flows, and estimated salvage values are shown below. 

Determine which one maximizes the financial worth of the company using the internal rate of return criterion only.  Use a MARR of 15% and a three year time horizon  The committee only considers the IRR criterion.

 

Proposal

Investment

Year 1

Year 2

Year 3

Salvage in last year

 

A1

($1,250,000)

$970,000

$640,000

$250,000

$300,000

 

A2

($1,050,000)

$480,000

$500,000

$600,000

$350,000

 

A3

($1,750,000)

$650,000

$700,000

$800,000

$750,000

       
 

MARR

15.0%

    
 

Years

3

    

 

Question 3

   

Score

0

Customers-R-Us, LLC had sales and costs as shown below in 2013. Any data that is not listed should be considered as zero.  Note that the parts are produced in lots of 10,000, so the setup costs are incurred each time that 10,000 parts needs to be produced.

a

What total costs (variable plus fixed) will be incurred in 2013?

b

What profit will be achieved in 2013

c

What is the break even quantity in 2013?

d

If the quantity, fixed cost  and the variable costs stay the same and only the price is changed, what price would have to be charged  to earn profits of  $250,000?

  

2013

    
 

Sold units

30,000

    
 

Unit Price

$23.50

    
 

Material Cost each

$1.75

    
 

Labor cost each

$4.25

    
 

Lot size

10,000

    
 

Setup cost per lot

$500.00

    
 

Annual Fixed Cost

$450,000

    

 

Question 4

   

Score

0

Awesome Gadget, Inc. is considering a new internal quality improvement program called ISO-9001.  A proposal income statement and some additional data are shown below.  

Benefits are expected in three area. The ISO-9001 registration should increase sales.   Total COGS is expected to stay constant even though sales increases.   And the improved quality will enable a decrease in inventory. These are defined below.

This proposal with require a one-time investment in record keeping software, added staff in all years, and substantial training expenses in year 1 and smaller amounts in later years.  The software is to be depreciated using straight line depreciation over 3 years ( salvage value and book value in year 3 is zero).  The other costs of the implementation will be expensed as S.G.& A.

The expected  balances for the various working capital categories are listed below.

The Income statement is shown below.  Determine the present worth and internal rate of return for the ISO-9000 proposal.

 

Year

0

1

2

3

 
 

Software Investment

$360,000

    
 

Depreciation

 

$120,000

$120,000

$120,000

 
 

Forecasted sales revenue

 

$300,000

$400,000

$600,000

 
 

Added staff

 

$150,000

$150,000

$150,000

 
 

Training

 

$300,000

$50,000

$20,000

 
 

Total Inventory

$410,000

$365,000

$335,000

$315,000

 
 

Total Accounts Receivable

$650,000

$620,000

$580,000

$530,000

 
 

Total Accounts Payable

$580,000

$565,000

$545,000

$520,000

 
 

Proposal life horizon

3

years

   
 

Income tax rate

25%

annually

   
 

Capital Gains tax rate

15%

    
 

MARR

10%

    
       

Income Statement for changes

     
 

Year

0

1

2

3

 
 

Sales Increase

 

$300,000

$400,000

$600,000

 
 

COGS Change

 

$0

$0

$0

 
 

Gross Margin

 

$300,000

$400,000

$600,000

 
 

Increased Staff

 

($150,000)

($150,000)

($150,000)

 
 

Training

 

($300,000)

($50,000)

($20,000)

 
 

S.G.& A.

 

($450,000)

($200,000)

($170,000)

 
 

Depreciation

 

($120,000)

($120,000)

($120,000)

 
 

EBIT

 

($270,000)

$80,000

$310,000

 
 

Income Taxes

 

$67,500

($20,000)

($77,500)

 
 

Net Income

 

($202,500)

$60,000

$232,500

 

 

Question 5

   

Score

0

       

Medical Miracles, INC. (MMI), a medical products distributor, is considering a proposal to make an acquisition of another company for $50 million.  This acquisition would increase their gross margin by 40% over their present  gross margin.  SG&A would increase by 30% with the acquisition.  A one time increase in  working capital of $1,250,000 would immediately be needed (year 0).  Assets worth $30 million  that came with the acquisition could be depreciated using 10-year MACRS.  The income and cash flow statements without the acquisition are shown below.

       

To simplify things a little, assume that the book value and salvage value at the end of year 5 are zero. (therefore there would be no gain to be taxed).

       

Determine if the proposal is financially justified using the following data and a 5-year time horizon.

       
 

Price of company

$50,000,000

           
 

Depreciable assets

$30,000,000

of purchased company

         
 

Gross Margin increase

40%

in all years

          
 

S.G.& A. Increase

30%

in all years

          
 

Working Capital Increase

$1,250,000

year 0

          
              
 

Income Tax Rate

13.5%

           
 

MARR

15%

           
 

10-year MACRS

            
 

Year

0

1

2

3

4

5

6

7

8

9

10

11

 

Percentage

 

10.00%

18.00%

14.40%

11.52%

9.22%

7.37%

6.55%

6.55%

6.56%

6.55%

3.28%

 

Depreciation

 

$3,000,000

$5,400,000

$4,320,000

$3,456,000

$2,766,000

$2,211,000

$1,965,000

$1,965,000

$1,968,000

$1,965,000

$984,000

 

Book value

 

$27,000,000

$21,600,000

$17,280,000

$13,824,000

$11,058,000

$8,847,000

$6,882,000

$4,917,000

$2,949,000

$984,000

$0

              

Present

            
 

Income Statement if company not acquired

           
 

Years

0

1

2

3

4

5

      
 

Revenue

 

$100,000,000

$112,000,000

$125,440,000

$140,492,800

$157,351,936

      
 

COGS

 

($65,000,000)

($72,800,000)

($81,536,000)

($91,320,320)

($102,278,758)

      
 

Gross margin

 

$35,000,000

$39,200,000

$43,904,000

$49,172,480

$55,073,178

      
 

S.G.&A.

 

($10,000,000)

($11,000,000)

($12,000,000)

($13,000,000)

($14,000,000)

      
 

EBIT

 

$25,000,000

$28,200,000

$31,904,000

$36,172,480

$41,073,178

      
 

Income Tax

 

($3,375,000)

($3,807,000)

($4,307,040)

($4,883,285)

($5,544,879)

      
 

Net Income

 

$21,625,000

$24,393,000

$27,596,960

$31,289,195

$35,528,299

      
              
 

Cash Flow Statement if company not acquired

          
 

Years

0

1

2

3

4

5

      
 

Net Income

 

$21,625,000

$24,393,000

$27,596,960

$31,289,195

$35,528,299

      
 

Depreciation

 

$0

$0

$0

$0

$0

      
 

Change in working capital

 

$0

$0

$0

$0

$0

      
 

Investment

$0

    

 

      
 

Cash flow

$0

$21,625,000

$24,393,000

$27,596,960

$31,289,195

$35,528,299

      
              

 

Question 6

   

Score

0

  

Superb Smart Phones, Inc. (SSP) is evaluating whether to lease a new machine that will enablea  decrease in COGS  of $150,000 annually.  There will be no changes in S.G. & A. expenses except for the lease expenses of the new machine.  A 3-year analysis has been requested using a MARR of 18% effective annual rate, 

  

The new machine can be leased for $10,000 monthly with the lease payment due at the beginning of each month. All training will be done in year 1 and is budgeted at $50,000.  The present machines are fully depreciated and have zero salvage value.

  

Income and capital gains tax rates are 15%.  The depreciation should use 5-year MACRS. Proposals are evaluated using a MARR of 18% (EAR), which should also be used for rate conversions.

  

Analyze whether the proposal for the new machine is financially justified using  3-year time horizon.

  
         
 

Monthly lease cost

$10,000

Beginning of month

     
 

Revenue

$150,000

      
 

Training in year 1

$50,000

      
 

Tax rate

15%

      
 

MARR

18.00%

EAR

     
 

MACRS 5-year

Year

1

2

3

4

5

6

  

Percentage

20.00%

32.00%

19.20%

11.52%

11.52%

5.75%

 

Question 7

   

Score

0

  

Perfect Production Parts (PPP) has a machine that no longer can produce perfect parts and must be replaced. Two quotes have been received.  The replacement of the machine will not have any effect on quantity produced or sold, revenue,  nor S.G.& A. (except depreciation).  The cost of the replacement machine will be depreciated using 5-year MACRS. 

  

Machine A costs $110,000 and this vendor will pay $10,000 for the present machine (in year 0).  It is forecasted that COGS with this machine will be $24,000 annually.  Machine A has an estimated value of $20,000 at the end of year 4 although it would most likely not be sold.

  

Machine B costs $135,000 but has a lower annual operating costs.  It is forecasted that COGS with this machine will be $17,500 annually.  This vendor will pay $15,000 for the present machine in year 0. Machine B has an estimated value of $25,000 at the end of year 4 although it would most likely not be sold.

  

The present machine is fully depreciated and therefore has a book value of zero. 

  

Perform a 4-year financial analysis using a MARR of 13% and suggest which of the two alternative should be chosen.

  
         
 

Data block

       
 

MARR=

13.00%

      
 

Income Tax rate

18.00%

      
 

Capital Gains tax rate

15.00%

      
 

Proposal Time horizon

4

years

     
 

Machine

A

B

     
 

Purchase Cost

$110,000

$135,000

     
 

Annual COGS

$24,000

$17,500

     
 

Present Machine payment

$10,000

$15,000

     
 

Salvage Value

$20,000

$25,000

     
         
 

5-year MACRS

Year

1

2

3

4

5

6

  

Percentage

20.00%

32.00%

19.20%

11.52%

11.52%

5.75%

 

Question 8

   

Score

0

 

Due to the budget sequester, the bridge department had their  repair budget reduced for the coming year.  The cost of repair for several bridges needing repair are shown below.  Also shown is the average number of cars per day that travel over each bridge.   If the bridge department only has sufficient resources to repair one bridge per year, which one should be repaired first from a cost effectiveness perspective.

        
 

Bridge

Repair Costs

Average Cars per day

    
 

Washington

$2,400,000

1600

    
 

Adams

$2,700,000

1500

    
 

Jefferson

$2,300,000

1740

    
 

Madison

$2,240,000

1550

    
 

Jackson

$2,000,000

1440

    

 

Question 9

   

Score

0

  

Below is an Income and cash flow statements for a new product model that management has approved.   Two scenarios besides the original forecast  are listed below along with the probability of each occurring.  The model uses links to the Original forecast in the data block only.

  

a

Determine the expected worth and expected internal rate of return for the three possible scenarios.

  

b

Write a sentence or two recommendation to management concerning the answer to part a.

  
  

Original Forecast

Forecast X

Forecast Y

    
 

Probability of occurrence

40%

25%

35%

    
 

Sales quantity in Year 1

40,000

35,000

45,000

    
 

Annual Sales Increase

20%

10%

25%

    
 

Unit Price

$38.88

$38.88

$38.88

    
 

COGS each

$12.50

$14.00

$12.00

    
 

S.G.& A.

$800,000

$800,000

$800,000

    
 

Income tax rate

35%

35%

35%

    
 

MARR

15%

15%

15%

    
 

Investment

$2,000,000

$2,500,000

$1,750,000

    
         
 

Years

0

1

2

3

4

5

6

 

Sales Quantity Forecast

 

40,000

48,000

57,600

69,120

82,944

99,533

 

Depreciation 5-year MACRS

 

20.00%

32.00%

19.20%

11.52%

11.52%

5.76%

         
 

Income Statement

0

1

2

3

4

5

6

 

Sales revenue

 

$1,555,200

$1,866,240

$2,239,488

$2,687,386

$3,224,863

$3,869,835

 

Cost of goods sold

 

($500,000)

($600,000)

($720,000)

($864,000)

($1,036,800)

($1,244,160)

 

Gross Margin

 

$1,055,200

$1,266,240

$1,519,488

$1,823,386

$2,188,063

$2,625,675

 

General, Sales and Admin.

 

($800,000)

($800,000)

($800,000)

($800,000)

($800,000)

($800,000)

 

Depreciation

 

($400,000)

($640,000)

($384,000)

($230,400)

($230,400)

($115,200)

 

EBIT

 

($144,800)

($173,760)

$335,488

$792,986

$1,157,663

$1,710,475

 

Income tax

 

$50,680

$60,816

($117,421)

($277,545)

($405,182)

($598,666)

 

Net income

 

($94,120)

($112,944)

$218,067

$515,441

$752,481

$1,111,809

         
 

Cash Flow Statement

       
 

Net Income

 

($94,120)

($112,944)

$218,067

$515,441

$752,481

$1,111,809

 

Add depreciation

 

$400,000

$640,000

$384,000

$230,400

$230,400

$115,200

 

Investment

(2,000,000)

 

 

 

 

 

 

 

Change in Working Capital

 

($155,520)

($31,104)

($37,325)

($44,790)

($53,748)

($64,497)

 

Cash flow

($2,000,000)

$150,360

$495,952

$564,742

$701,051

$929,133

$1,162,512

         
  

Present Worth =

IRR

     
  

$242,443

18.39%

     

 

Question 10

Suppose your CEO catches you at the coffee machine and says, "What is this "Time Value of Money" thing that you mentioned in the meeting yesterday?  You have all those degrees so explain this to  me clearly, not with quotes from a textbook or website."  Write an explanation for the CEO using an example(s).  Limit this to 500 words.  Post this in the space below or in a separate MS Word document.

 

 

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