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Problem 3...

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Problem 3 You have been asked by the President of Mega Corporation to evaluate the proposed acquisition of a new machine. The machine?s basic price is $50,000 and it will cost another $10,000 to modify it for special use by Mega Corporation. The machine falls into the MACRS 3-year class. It will be sold after four years for $10,000. The machine would require an increase in net working capital of $2,000. The purchase of new machine will not affect revenues, but it is expected to save Mega Corporation $20,000 per year in before-tax operating costs (mainly labor). Mega?s marginal tax rate is 40 percent. Required: a. What is the Corporation?s initial investment outlay if it acquires the machine? That is, what are the Year 0 cash flows? b. What are the incremental operating cash flows in Years 1, 2, 3, and 4? c. What is the terminal cash flow in Year 4? d. If the project?s cost of capital is 10 percent, should Mega purchase the machine? Evaluate the project based on both NPV and IRR methods. Meta Corporation?s 2007 financial statements are shown below: Meta Corporation Income Statement for the period ending December 31, 2007 (Thousands of Dollars) Sales $ 12,000 Operating costs 10,261 EBIT $ 1,739 Interest expense 339 EBT 1,400 Taxes (40%) 560 Net Income 840 Dividends (60%) $ 504 Additions to retained earnings 336 Meta Corporation Balance sheet as of December 31, 2007 (Thousands of Dollars) Cash $ 600 Accounts payable $2,400 Receivables 3,600 Notes payable 1,157 Inventories 4,200 Accruals 840 TCA $ 8,400 TCL $ 4,397 Mortgage bonds 1,667 Common stock 667 Net fixed assets 7,200 Retained earnings 8,869 TA $15,600 TL&E $15,600 Suppose 2008 sales are projected to increase by 20% over 2007 sales. Determine the additional funds needed. Assume that Meta Corporation is operating at full capacity in 2007. Construct the pro forma financial statements using the percent of sales method. Use an interest rate of 14% on the debt balance at the beginning of the year. Explain the process of calculating interest for income statement purposes.

 

Paper#5467 | Written in 18-Jul-2015

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