Question;Assignment 4: Management Accounting Case: Cayuga Cookies, Inc.;The specific course learning outcomes associated with this assignment are;?;Determine how capital budgeting is used in long-term financial decisions.;?;Apply management accounting concepts to identify and process relevant financial;information for decision-making purposes.;?;Use technology and information resources to research issues in financial reporting and;analysis.;?;Write clearly and concisely about financial reporting and analysis using proper writing;mechanics.;Assignment;Sophie Morgan, President of Cayuga Cookies, Inc. (CCI), was trying to decide whether to expand;the company by adding a new product line. The proposal seemed likely to be profitable and;adequate funds to finance it could be obtained from outside investors.;CCI had long been regarded as a well-managed company. It had succeeded in keeping its;present product lines up to date and had maintained a small but profitable position in a highly;competitive industry.;The amount of capital presently employed by the company was approximately $4,000,000, and;was expected to remain at this level whether the proposal for the new product line was accepted;or rejected. Net income from existing operations amounted to about $400,000 a year, and;Morgan?s best forecast was that this would continue to be the income from present operations.;Introduction of the new product line would require an immediate investment of $400,000 in;equipment and $250,000 in additional working capital. A further $100,000 in working capital;would be required a year later.;Sales of the new product line would be relatively low during the first year, but would increase;steadily until the sixth year. After that, changing tastes and increased competition would probably;begin to reduce annual sales. After eight years, the product line would probably be withdrawn;from the market. At that time, the company would dispose of the equipment and liquidate the;working capital. The cash value of steps to close the product line at that time would be about;$350,000.;The low initial sales volume, combined with heavy promotional outlays, would lead to heavy;losses in the first two years, and no net income would be reported until the fourth year. The profit;forecasts for the new product line are summarized in Exhibit 1.;Morgan was concerned about the effect this project would have on CCI's overall reported;profitability over the next three years. On the other hand, "eyeballing" the figures in Exhibit 1 led;Morgan to guess that if the proposal were analyzed using after-tax cash flows discounted at 10;percent, it might well show a positive net present value, and hence could be a worthwhile;investment opportunity.;JWI 530: Financial Management I;Academic Submissions and Evaluations;?2014 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary;information and may not be copied, further distributed;or otherwise disclosed in whole or in part, without the expressed;written;permission of Strayer University.;JWMI 530 ? Spring 2014;Exhibit 1;Income Forecast for New Product Line;Year Forecasted;Incremental;Cash Flow;from;Operations;1;(1);Depreciation;Expense on;New;Equipment;2;(2);Forecasted;Incremental;Income;Before Tax;(3) = (1 + 2);Income Tax;3;at 40%;(4);Forecasted;Incremental;Net Income;After Tax;4;(5) = (3 + 4);1 (350,000) (50,000) (400,000) 160,000 (240,000);2 (100,000) (50,000) (150,000) 60,000 (90,000);3 0 (50,000) (50,000) 20,000 (30,000);4 200,000 (50,000) 150,000 (60,000) 90,000;5 500,000 (50,000) 450,000 (180,000) 270,000;6 1,000,000 (50,000) 950,000 (380,000) 570,000;7 900,000 (50,000) 850,000 (340,000) 510,000;8 650,000 (50,000) 650,000 (240,000) 360,000;Notes;1. In this column, numbers in parentheses indicate cash outflow.;2. In this column, numbers in parentheses indicate an expense (i.e., something that reduces;profits). For the purpose of this analysis, we may use these depreciation figures for the;determination of both Net Income and Income Tax that will be paid to the government.;3. When forecasted incremental income before taxes is negative, the firm is entitled to a tax;rebate at 40%, either from taxes paid in previous years or from taxes currently due on;other company operations. Therefore, in this column, numbers in parentheses indicate;taxes paid to the government and numbers not in parentheses indicates tax rebates;received from the government.;4. In this column, numbers in parentheses indicate a net loss produced by the new product;line and numbers not in parentheses indicate a net profit made by this new product line.;Required;1. Calculate the nominal and discounted payback periods for this proposed project.;2. Calculate the net present value and internal rate of return of the proposed project.;3. Referring to your analysis in parts (1) and (2), what is your recommendation regarding;the proposed project under the following three scenarios (note: comment on any;similarities or differences in your recommendations across these three scenarios);a. If CCI was a private company, owned entirety by Sophie Morgan?;b. If CCI was a publicly owned company, with shares owned by a large number of;small investors, and Morgan purely a salaried administrator?;c. If CCI was a wholly owned subsidiary of a much larger company and Morgan;expected to be a candidate to succeed one of the parent company's top;executives who will retire from the company in about two years from now?
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