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Awesome Gadget, INC is considering making an additional investment of in its production capabilities




Question;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;$1,00,000;$1,10,000;$1,20,000;Investment;$3,50,000;Forecasted sales quantities;3,40,000;5,40,000;10,00,000;Working capital;$7,50,000;$7,75,000;$7,25,000;$6,75,000;Depreciation;$5,10,000;$4,60,000;$4,00,000;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 usingthe internal rate of return;criterion only. Use a MARR of 15% and;a three year time horizon The;committee onlyconsiders the IRR criterion.;Proposal;Investment;Year;1;Year;2;Year;3;Salvage;in last year;A1;($12,50,000);$9,70,000;$6,40,000;$2,50,000;$3,00,000;A2;($10,50,000);$4,80,000;$5,00,000;$6,00,000;$3,50,000;A3;($17,50,000);$6,50,000;$7,00,000;$8,00,000;$7,50,000;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;$4,50,000;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;$3,60,000;Depreciation;$1,20,000;$1,20,000;$1,20,000;Forecasted sales revenue;$3,00,000;$4,00,000;$6,00,000;Added staff;$1,50,000;$1,50,000;$1,50,000;Training;$3,00,000;$50,000;$20,000;Total Inventory;$4,10,000;$3,65,000;$3,35,000;$3,15,000;Total Accounts Receivable;$6,50,000;$6,20,000;$5,80,000;$5,30,000;Total Accounts Payable;$5,80,000;$5,65,000;$5,45,000;$5,20,000;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;$3,00,000;$4,00,000;$6,00,000;COGS Change;$0;$0;$0;Gross;Margin;$3,00,000;$4,00,000;$6,00,000;Increased Staff;($1,50,000);($1,50,000);($1,50,000);Training;($3,00,000);($50,000);($20,000);S.G.;A.;($4,50,000);($2,00,000);($1,70,000);Depreciation;($1,20,000);($1,20,000);($1,20,000);EBIT;($2,70,000);$80,000;$3,10,000;Income Taxes;$67,500;($20,000);($77,500);Net Income;($2,02,500);$60,000;$2,32,500;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;$500,00,000;Depreciable assets;$300,00,000;of purchased company;Gross Margin increase;40%;in all years;S.G.& A. Increase;30%;in all years;Working Capital Increase;$12,50,000;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;$30,00,000;$54,00,000;$43,20,000;$34,56,000;$27,66,000;$22,11,000;$19,65,000;$19,65,000;$19,68,000;$19,65,000;########;Book;value;$270,00,000;$216,00,000;$172,80,000;$138,24,000;$110,58,000;$88,47,000;$68,82,000;$49,17,000;$29,49,000;$9,84,000;$0;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;$1,50,000;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;$1,10,000;$1,35,000;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;$24,00,000;1600;Adams;$27,00,000;1500;Jefferson;$23,00,000;1740;Madison;$22,40,000;1550;Jackson;$20,00,000;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.;$8,00,000;$8,00,000;$8,00,000;Income tax rate;35%;35%;35%;MARR;15%;15%;15%;Investment;$20,00,000;$25,00,000;$17,50,000;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;$15,55,200;$18,66,240;$22,39,488;$26,87,386;$32,24,863;$38,69,835;Cost of goods sold;($5,00,000);($6,00,000);($7,20,000);($8,64,000);($10,36,800);($12,44,160);Gross Margin;$10,55,200;$12,66,240;$15,19,488;$18,23,386;$21,88,063;$26,25,675;General, Sales and Admin.;($8,00,000);($8,00,000);($8,00,000);($8,00,000);($8,00,000);($8,00,000);Depreciation;($4,00,000);($6,40,000);($3,84,000);($2,30,400);($2,30,400);($1,15,200);EBIT;($1,44,800);($1,73,760);$3,35,488;$7,92,986;$11,57,663;$17,10,475;Income tax;$50,680;$60,816;($1,17,421);($2,77,545);($4,05,182);($5,98,666);Net income;($94,120);($1,12,944);$2,18,067;$5,15,441;$7,52,481;$11,11,809;Cash Flow Statement;Net Income;($94,120);($1,12,944);$2,18,067;$5,15,441;$7,52,481;$11,11,809;Add depreciation;$4,00,000;$6,40,000;$3,84,000;$2,30,400;$2,30,400;$1,15,200;Investment;-20,00,000;Change in Working Capital;($1,55,520);($31,104);($37,325);($44,790);($53,748);($64,497);Cash flow;($20,00,000);$1,50,360;$4,95,952;$5,64,742;$7,01,051;$9,29,133;$11,62,512;Present;Worth =;IRR;$2,42,443;18.39%;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. Refer attachment for ques


Paper#51916 | Written in 18-Jul-2015

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