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Company A is considering making an additional investment in its production capabilities. It has collected data...




Question;Question 1;Score;0;Company A is considering making an additional investment in its production capabilities. It has collected data on the past;year's (year 0) revenue, costs and quantity sold. Future Sales quantities are forecasted to be as shown in the data block;below.;The price per unit will be increased $2.50 annually (year-1 unit price =;year-0 unit price + $2.50, year-2 price = Year-1 price +;$2.50, etc.);COGS per unit produced is forecast to decrease 5% annually (cost per unit in year-1 to be 5% less than the year-0 unit cost;year-2 unit cost will be 5% less than year-1, etc.);Fixed cost (S.G. & A.) excluding depreciation will be constant for;all years. Depreciation for each year is to be as shown in the;data block (does not have to be calculated).;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 format with appropriate totals.;Years;Revenue in year 0;COGS - year 0;Quantity produced/sold;Forecasted sales quantities;Working capital;Depreciation;Investment;S.G. & A.;Income Tax rate;MARR;Unit price increase;Unit COGS decrease;Solution;0;$3,211,000.00;$2,281,500.00;84,500;$750,000.00;$540,000.00;$350,000.00;$1,258,000.00;14.00%;20.00%;$2.50;5.00%;1;2;3;95,100;$720,000.00;$510,000.00;106,400;$690,000.00;$460,000.00;100,000;$650,000.00;$400,000.00;annually;annually;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. A MARR of 15% and a six year time-span is to;be used. The committee only uses the IRR criterion.;Determine which one maximizes the financial worth of the company using the internal rate of return;criterion.;Proposal;Investment;A1;A2;A3;($1,750,000);($1,550,000);($2,250,000);MARR;15.0%;Years;6;Solution;Annual cash;flow;$510,000;$480,000;$670,000;Salvage in;last year;$80,000;$30,000;$75,000;19.38%;21.44%;20.06%;Question 3;Score;0;Company C is considering a $5 million investment that will have a useful life of 8 years, and;sold in the eighth year for $750,000. It will be depreciated using 10-year MACRS (table is;below).;a;Determine the depreciation for each year of the eight year life of the investment;b Determine the book value at the end of the eight years.;c;Determine the capital gain or loss when sold in the eighth year.;d;If the capital gain tax rate is 10%, what will be the capital gains tax?;0;10 year MACRS;Solution;1;10.00%;2;18.00%;3;14.40%;4;11.52%;5;9.22%;6;7.37%;7;6.55%;8;6.55%;9;6.56%;10;6.55%;11;3.28%;Question 4;Score;0;Company A is considering a new expanded nation-wide marketing program. A proposal income statement and some additional;data are shown below. (The figures are in thousands of dollars, but this;need not be part of the calculations as it will not make;any difference in the conclusion.);This proposal does not require any assets that can be depreciated. Assume that the proposed $3,000 marketing program is all;S.G.&A. expense and includes all additional the S.G. & A. expenses needed for the marketing program.;Accounts receivable is forecasted to be 30% of revenue in each year starting with year 1. Finished Inventory is forecast at 10%;of revenue also starting in year 1.;Accounts Payable is forecast to be $1,000 in year 0 and 20% of the cost of goods sold in each year after year 0. Materials;inventory is forecasted at $1,500 in year 0 and 15% of the cost of goods sold in the years after year 0.;Prepare a cash flow statement and determine the present worth.;Income Statement;Year;0;1;$10,500;($6,000);$4,500;($3,000);$1,500;($375);$1,125;2;$15,000;($7,500);$7,500;($3,000);$4,500;($1,125);$3,375;year 0;$0;$0;$1,000;$1,500;$3,000;3;25%;10%;Percent;30%;10%;20%;15%;of;Revenue;Revenue;COGS;COGS;Sales due to marketing program;COGS;Gross Margin;Marketing Program Expense;EBIT;Income Taxes;Net Income;Accounts Receivable;Finished Inventory;Accounts Payable;Materials Inventory;Proposal annual cost;Proposal life span;Income tax rate;MARR;Solution;years;annually;annually (EAR);3;$25,000;($12,000);$13,000;($3,000);$10,000;($2,500);$7,500;Question 5;Score;0;Company D, a medical products distributor, is considering a proposal to establish an R&D group to study and recommend;product innovations. They have a close association with customers and suspect that this offers them knowledge for improving;products and for new products. The R&D group would add $500,000 in S.G.& A. expenses annually that is not depreciable.;The R&D group would patent their developments and contract others to build them.;The proposal suggests that the cost of the new R&D group be covered by a 3% price increase in all products. It is further;forecasted that this price increase would result in an immediate loss of 10% of sales revenues in year-1 from the year-0 level.;Starting in year 2, it is forecast that the product innovations would result in year-over-year revenue increases as shown in row;10 below;If the proposed changes are not implemented, revenues are expected to stay constant at the year 0 level.;COGS is 63% of revenue. S,G. & A. is presently $5 million annually and would not change if the proposal is not implemented.;Total Working capital is forecasted at 25% of revenue. There would be zero annual working capital change if the proposal is not;implemented.;Determine if the proposal is financially justified using the following data and a 5-year time span.;Revenue in year 0;year;Revenue change from previous;year;Revenue increase in year 2-5;COGS;Present S.G. & A;R&D group cost;Income Tax Rate;MARR;Solution;$20,000,000;0;2;3;4;5;-10%;15%;63%;$5,000,000;$500,000;15%;10%;1;5%;10%;15%;15%;of revenues;Question 6;Score;0;Company E has found that annual increases in its sales have diminished;to near zero (Note that this is the increases in sales that;are near zero, not the actual sales). To get growth started again, it;has been proposed to offer a "Not-so-smart" phone model. It;would be priced at 60% of the current "Smart" model. The new phone would not have a camera, GPS capabilities and other;capabilities that require special hardware/chips. It simply would be a good user-friendly wireless telephone.;A market research study determined that there indeed was a market for such a phone as a substantial number of users only use the;telepone capibiltiies. It would be made to look much like the "Smart" version so people would not know which phone others were;using. The downside is that it would result in a decrease in demand for the present "Smart" model.;Depreciation averages $600,000 annually (some assets bought, some sold) and this is not expected to change due to the proposal.;If the "not-so-smart" phone was added, S.G.& A. would increase by $3,000,000 annually.;The cost to develop and introduce the 'Not-so-Smart" model would be $20;million in year 0. This is not depreciable as no additional;assets will be needed to produce the new phone.;Determine if the $20 million investment is financially justified using a 3-year time span.;Smart" model revenue;Not-so-smart" revenue;Depreciation;Working capital- both;Depreciable assets;Income tax rate;MARR;Investment in year 0;Solution;Price;$400;$240;$600,000;no change;none;17%;15%;$20,000,000;Forecasted;annual revenue;Forecasted;without;Annual Revenue COGS percent;proposal;with proposal;of revenue;$75,000,000;$70,000,000;65%;$0;$25,000,000;40%;no change if proposal implemented.;not depreciable;S.G.& A.;$10,000,000;$3,000,000;Question 7;Score;0;Two alternative replacement machines are described below that are being considered to replace a current one;that has no salvage value. The present machine must be replaced and the replacement will not have any;effect on quantity produced or sold, revenue, or S.G.& A. (except depreciation). The cost of the replacement;machine will be depreciated using 5-year MACRS. The project evaluation time span should be 6 years.;Machine A, while less expensive, only has a life span of 3 years Therefore it will have to be replaced at the;end of year 3. Therefore its investment will be incurred both in year 0 and in year 3. Its salvage value will be;received when replaced.;Machine B is more expensive but will last 6 years and has a lower annual operating costs.;All cost information is listed below. Performa a financial analysis to compare the alternatives.;Data block;MARR=;Income Tax rate;Capital Gains rate;Time span;Machine;Purchase Cost;Salvage Value;Annual COGS;5-year MACRS;Solution;13.00%;18.00%;15.00%;6;years;A;B;$70,000;$150,000;$5,000;$30,000;$8,500;$5,000;Year;1;Percentage;20%;2;32%;3;19.20%;4;11.52%;5;11.52%;6;5.76%;Question 8;Score;0;Below is an Income and cash flow statements for a new product model that management has approved. (If there are errors or;oversights, that is their problem, not yours). Both question parts a and;b should start from the original data. The cells with a green;background contain the original values and are shown only to assist you in reverting back to the original values if needed.;a;Note that the present worth is negative. Determine the Investment amount that would achieve the MARR. Describe how you;determined this.;b;What would be the present worth if the price was increased to $37.99 in all years and this resulted in a 5% decline in the;Sales Quantity Forecast". (note that years 2-6 are all linked to year 1). Describe how you determined this.;Copy of Original;Values;Sales quantity in Year 1;Annual Sales Increase;Unit Price (all years);COGS each;S.G.& A.;Income tax rate;MARR;Investment;Years;35,000;20%;$35.99;$12.50;$800,000;35%;15%;$2,000,000;0;35,000;20%;$35.99;$12.50;$800,000;35%;15%;$2,000,000;1;35,000;20.00%;$1,600,000;2;42,000;32.00%;$960,000;3;50,400;19.20%;$576,000;4;60,480;11.52%;$345,600;5;72,576;11.52%;$115,200;6;87,091;5.76%;$0;0;1;$1,259,650;($437,500);$822,150;($800,000);($400,000);($377,850);$132,248;($245,603);2;$1,511,580;($525,000);$986,580;($800,000);($640,000);($453,420);$158,697;($294,723);3;$1,813,896;($630,000);$1,183,896;($800,000);($384,000);($104);$36;($68);4;$2,176,675;($756,000);$1,420,675;($800,000);($230,400);$390,275;($136,596);$253,679;5;$2,612,010;($907,200);$1,704,810;($800,000);($230,400);$674,410;($236,044);$438,367;6;$3,134,412;($1,088,640);$2,045,772;($800,000);($115,200);$1,130,572;($395,700);$734,872;($245,603);$400,000;($294,723);$640,000;($68);$384,000;$253,679;$230,400;$438,367;$230,400;$734,872;$115,200;($125,965);$28,433;($25,193);$320,084;($30,232);$353,701;($36,278);$447,801;($43,534);$625,233;($52,240);$797,832;Sales Quantity Forecast;Depreciation 5-year MACRS;Book Value;Income Statement;Sales revenue;Cost of goods sold;Gross Margin;General, Sales and Admin.;Depreciation;EBIT;Income tax;Net income;Cash Flow Statement;Net Income;Add depreciation;Investment;Change in Working Capital;Cash flow;(2,000,000);($2,000,000);Present Worth;=;($588,875);Solution;Forecast 2;40;15;1000000;40000;Page 9;Forecast 3;35;11.5;900000;60000;Page 10;Question 9 (same model as in Q8 with some data changes and additions);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;only.;a;Determine the expected worth and expected internal rate of return for the three scenarios.;b;Write a sentence or two recommendation to management concerning the answer to part a.;Original Forecast;25%;30,000;10%;$35.99;$14.00;$800,000;35%;15%;$2,500,000;25%;40,000;25%;$35.99;$12.00;$800,000;35%;15%;$1,750,000;0;1;50,000;20.00%;2;60,000;32.00%;3;72,000;19.20%;4;86,400;11.52%;5;103,680;11.52%;6;124,416;5.76%;0;1;$1,799,500;($625,000);$1,174,500;($800,000);($400,000);($25,500);$8,925;($16,575);2;$2,159,400;($750,000);$1,409,400;($800,000);($640,000);($30,600);$10,710;($19,890);3;$2,591,280;($900,000);$1,691,280;($800,000);($384,000);$507,280;($177,548);$329,732;4;$3,109,536;($1,080,000);$2,029,536;($800,000);($230,400);$999,136;($349,698);$649,438;5;$3,731,443;($1,296,000);$2,435,443;($800,000);($230,400);$1,405,043;($491,765);$913,278;6;$4,477,732;($1,555,200);$2,922,532;($800,000);($115,200);$2,007,332;($702,566);$1,304,766;($16,575);$400,000;($19,890);$640,000;$329,732;$384,000;$649,438;$230,400;$913,278;$230,400;$1,304,766;$115,200;($2,000,000);($179,950);$203,475;($35,990);$584,120;($43,188);$670,544;($51,826);$828,013;($62,191);$1,081,487;($74,629);$1,345,337;Present Worth =;$652,243;Years;Forecast Y;50%;50,000;20%;$35.99;$12.50;$800,000;35%;15%;$2,000,000;Probability of occurrence;Sales quantity in Year 1;Annual Sales Increase;Unit Price;COGS each;S.G.& A.;Income tax rate;MARR;Investment;Forecast X;IRR;23.75%;Sales Quantity Forecast;Depreciation 5-year MACRS;Income Statement;Sales revenue;Cost of goods sold;Gross Margin;General, Sales and Admin.;Depreciation;EBIT;Income tax;Net income;Cash Flow Statement;Net Income;Add depreciation;Investment;Change in Working Capital;Cash flow;Solution;*;*;*;*;(2,000,000);Question 10;The concepts of Benefit/Cost analysis and Cost effectiveness analysis;have been highly touted as the primary financial analysis tools of the;public sector. These tools can;also be applied to the private sector especially for internal financial;analysis decisions. Provide an example of how you would use each of;these concepts in the public and;private sectors. Limit your response to 75 words for each of the four examples. You can use a separate word document.refer attachment for formatted questions


Paper#37699 | Written in 18-Jul-2015

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