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1. Mark sexton and todd story, the owner of S&S Ai...




1. Mark sexton and todd story, the owner of S&S Air,Inc.,were impressed by the work Chris had done on financial planning. using Chris's analysis, and looking at the demand for light aircraft, they have decided that their existing fabrication equipment is sufficient, but it is time to acquire a bigger manufacturing facility. Mark and Todd have identified a suitable structure that is currently for sale, and they believe they can buy and refurbish it for about $22million. Mark, Todd and Chris are now ready to meet with Christie Vaughan, the loan officer for First United National Bank. The meeting is to discuss the mortgage option available to the company to finance the new facility Christie beings the meeting by discussing a 30-year mortgage. The loan would be repaid in equal monthly installments. Balance of the previous relationship between S&S Air and the bank, there would be no closing cost for the loan. Christie states that the APR of the loan would be 6.1 percent. Todd asks if a shorter mortgage loan is available. Christie says that the bank does have a 20-year mortgage available at the same APR. Mark decides to ask Christie about a "smart loan" he discussed with a mortgage broker when he was refinancing his home loan. A smart loan works as follows :Every two weeks a mortgage payment is made that is exactly one-half of the traditional monthly mortgage payment. Christie informs him that the bank does have smart loans. The APR of the smart loan would be the same as the APR of the traditional loan. Mark nods his head. He then states this is the best mortgage option available to the company since it saves interest payments. Christie agrees with mark but the suggests that a bullet loan, or balloon payment, would result in the greatest interest savings. At todd's prompting, she goes on to explain a bullet loan. The monthly payments of a bullet loan would be calculated using a 30-year traditional mortgage. In this case, there would be a a 5 year bullet. This would mean that the company wouls make the mortgage payments for the traditional 30-year mortgage for the first five years, but immediately after the company makes the 60th payment, the bullet payment would be due. The bullet payment is the remaining principal of the loan. Chris then ask how the bullet payment is calculated. Christie tells him that the remaining principal is calculated using an amortization table, but is is also the present value of the remaining 25 years of mortgage payments for the 30-year mortgage. todd has also heard of an interest-only loan and ask if this loan s available and what the terms would be. Christie says that the bank offers an interest-only loan with a term of 10 years and an APR of 3.5 percent. she goes on to further explain the terms. the company would be responsible for making interest payment each monthly on the amount borrowed. No principal payments are required. At the end of the 10-year term, the company would repay the $22 million. However, the company can make principal payment at any time. The principal payment would work just like those on a traditional mortgage. principal payments would reduce the principal of the loan and reduce the interest due on the next payment. mark and Todd are satisfied with Christie's answer, but they are still unsure of which loan they should choose. They have asked Chris to answer the following questions to help them choose the correct mortgage. A. What are the monthly payments for a 30-year traditional mortgage? What are the payments for a 20- year traditional mortgage? B. Prepare an amortization table for the first six month of the traditional 30-year mortgage. How much of the first payment goes toward principal. C . How long would it take for S&S Air to pay off the smart loan assuming 30-year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save? D. Assume S&S Air takes out a bullet loan under the terms described. what are the payments on the loan? E. Which mortgage is the best for the company? Are there any potential risks in this action? 2.Conch Republic Electronics is a mid sized electronics manufacturer located in Key West, Florida. The company president is Shelly Couts, who inherited the company. The company original repaired radios and other household appliance when it was founded over 70 years ago. Over the years, the company has expanded, and it is now a reputable manufacturer of various specialty electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company in the finance department. One of the major revenue- producing items manufactured by Conch Republic is a personal Digital Assistant (PDA). Conch Republic currently has one PDA model on the market and slaes have been excellent. The PDA is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffet music. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new PDA that has all the features of the existing one, but adds new features such as cell phone capability, The company has spent a further $200,000, for marketing study to determine the expected sales figures for the new PDA. Conch Republic can manufacture the new PDA for $215 each in variable costs. Fixed costs for the operation are estimated to run $4.3 million per year. The estimated sales volume is 65,000, 82,000,108,000,94,000 and 57,000 per year for the next five years, respectively. The unit price of the new PDA will be $500. The necessary equipment can be purchased for $32.5million and will be depreciated on a seven- year MACRS schedule. it is believed the value of the equipment in five years will be $3.5 million. Net working capital for the PDAs will be 20 percent of sales and will occur with the timing of the cash flows for the year (i.e, there is no initial outlay for NWC). Changes in NWC will thus first occur in year 1 with the first year's sales. Conch republic has a 35 percent corporate tax rate and a 12 pecent required return. Shelly has asked Jay to prepare a report that answers the following questions: A.what is the payback period of the project B.What is the profitability index of the project C.What is the IRR of the project D.What is the NPV of the project E.How sensitive is the NPV to change in the price of the new PDA F.How sensitive is the NPV to change in the quantity sold G.Should Conch Republic peoduce the new PDA H. Suppose Conch Republic loses sales on other models because of the introduction of the new models. How would this affect your analysis.,i want question 1&2 to be on a different file attachment. Thanks


Paper#6942 | Written in 18-Jul-2015

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