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MONARCH CORPORATION IS GOING TO START A NEW PRODUCT LINE OF PRODUCTS IN A WHOLE NEW MARKET.

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Question;COMPREHENSIVE CHAPTER 12 & 13 PROBLEMSMONARCH CORPORATION IS GOING TO START A NEW PRODUCT LINE OF PRODUCTS IN A WHOLE NEW MARKET.THE DATA FOR ANALYSIS IS PRESENTED BELOW:COST OF THE EQUIPMENT NEEDED $200,000 FIVE YEAR PROPERTY LIFE FOR TAX DEPRECIATION NEW WORKING CAPITAL NEEDS $50,000 WILL BE RECOVERED AT THE END OF THE THIRD YEARPROJECTED NEW REVENUES:SALES PROBABILITY$225,000 30%$350,000 50%$500,000 20%COST OF GOOD SOLD 25% OF SALESVARIABLE CASH COSTS 15% OF SALESANNUAL FIXED CASH COSTS:RENT $50,000CLEANING $20,000MAINTENANCE & OTHER $20,000TOTAL FIXED COSTS $90,000EQUIPMENT DISPOSAL PROCEEDS $20,000 SALVAGE VALUE AT THE END OF YEAR 6FIRM'S COST OF CAPITAL 9.00%TAX RATE 30%NOTE - WHEN COMPUTING TAX A NET LOSS FOR THE YEAR A POSITIVE TAX SAVINGS IS CREATEDSINCE THERE IS OTHER INCOME TAX ON OTHER INCOME TO OFFSETDEPRECIATION RATES FOR TAX PURPOSES:YEAR ONE 20.00%YEAR TWO 32.00%YEAR THREE 19.20%YEAR FOUR 11.50%YEAR FIVE 11.50%YEAR SIX 5.80%ASSUMPTIONS:ALL CASH FLOWS IN YEARS 1-6 OCCUR AT THE END OF THE YEAR. ALL INITIAL CASH INFLOWS OROUTFLOWS OCCUR TODAY.REQUIRED:A. ASSUMING SALES ARE $225,000 COMPUTE THE PAYBACK, IRR AND NPV. FOR THE NPV COMPUTEAT BOTH THE FIRM'S DISCOUNT RATE AND 11%, WHICH IS A 2% PREMIUM ADDED TO THE RATE.B. COPY THE WHOLE WORKSHEET AND SOLUTIONS FOR PART A TO THE WORSHEET NAMED PART B,AND REDO THE COMPUTATIONS BY CHANGING THE ANNUAL SALES TO $350,000.C. COPY THE WHOLE WORKSHEET AND SOLUTIONS FOR PART A TO THE WORSHEET NAMED PART C,AND REDO THE COMPUTATIONS BY CHANGING THE ANNUAL SALES TO $500,000.Fill in all of the Cells below in Yellow using the information given above.PART AYEARS 0 1 2 3 4 5 6INITIAL INVESTMENT (NO INCOME TAX AFFECTS)COST OF THE EQUIPMENT NEEDEDWORKING CAPITAL NEEDSTOTAL INITIAL INVESTMENTANNUAL OPERATING RECEIPTSSALESLESS COST OF GOODS SOLDGROSS PROFITLESS VARIABLE COSTSLESS FIXED COSTSLESS DEPRECIATIONPROFIT BEFORE TAXLESS INCOME TAXPROFIT AFTER TAXPLUS DEPRECIATIONTOTAL OPERATING CASH FLOWSSALVAGE VALUE ON EQUIPMENTPROCEEDSLESS TAX BASIS OF EQUIPMENT:COSTACCUMULATED DEPRECIATIONTAX BASISGAIN ON SALVAGELESS TAX ON SALVAGE GAINNET PROCEEDS ON SALVAGERELEASE OF WORKING CAPITAL (NO TAX AFFECT)TOTAL CASH FLOWS - - - - - - -CUMULATIVE CASH FLOWS - - - - - -THREE METHODS OF EVALUATIONPAYBACK YEARSINTERNAL RATE OF RETURN NET PRESENT VALUE AT 9.00%NET PRESENT VALUE AT 11.00%

 

Paper#44054 | Written in 18-Jul-2015

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