Your company was bought by a large corporation and you are now one of seven plants vying for investment funds. You are preparing a financial analysis for the adoption of a complex proposal to submit to a corporate investment committee.

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Question 1

Evaluate the following Cash Flows using the criteria in parts a-f and MARR. Parts a-d should use a 6-year time span. Indicate for each part whether the proposal should be accepted or rejected.

MARR=10%

Year 0 1 2 3 4 5 6

Cash Flow ($80,000) $13,200 $19,800 $22,100 $25,000 $25,000 $20,000

 

a Present Worth (PW)

b Future Worth (FW)

c Annual Worth (AW)

d Internal rate of Return (IRR)

e Discounted Payback by end of year (EOY) 4

f Traditional Payback (no discounting) by end of year (EOY) 4

 

Question2

Three alternatives have been proposed with the investment and forecasted annual cash flows shown below. Salvage values should be ignored. A MARR of 12.5% and a four year time-span is to be used. Resources are available for only one of the three alternatives.

Determine which one should be selected usingonly  the internal rate of return criterion.
Enhancement Annual cash flow Investment
A1 $17,50,000 $50,00,000
A2 $15,50,000 $44,00,000
A3 $13,00,000 $37,00,000
Enhancement Annual cash flow Investment
A1 $17,50,000 $50,00,000
A2 $15,50,000 $44,00,000
A3 $13,00,000 $37,00,000

Question 3

Third-in-Line, LLC had sales and costs as shown below in 2012..

a What was the profit in 2012

b What is the break even quantity?

c If the price, fixed cost and the variable cost per unit stay the same as in 2012, what will the quantity sold have to be to increase profits to $1 million in the coming year?

d If the sales quantity, price, and fixed cost stay the same as in 2012, what would the unit variable cost need to be to increase profits to $1 million in the coming year?

2012

Sold units 50,000

Total Revenue $25,00,000

Total Variable cost $12,00,000

Total Fixed Cost $5,00,000

 

 

Question4

Anthony and Sons, Inc. is evaluating a proposal for a new robotic assembly machine that is expected to need replacing after 6 years of use. The new machine will reduce direct labor, and with the lower price that this enables, will increase sales. The problem is that it is expensive. Using the data below, construct the Income statement part of a financial analysis. Show all subtotals.

Purchase price of Robotic Assembly Machine (RAM) $100,00,000 year 0
Present annual sales $100,00,000 constant for all years
Forecasted annual sales increase 20% in year 1 and then constant at this level for the remaining years
Present COGS 40% of sales
Forecasted COGS 25% of sales
S.G. & A without depreciation $25,00,000 annually and not changed by proposal
Depreciation MACRS 5 years
Proposal life span 6 years
Income tax 18% annually
MARR 10% annually
1 2 3 4 5 6
MACRS 5-year 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%

 

 

Question 5

Modern Medical Mechanics (M3) is going to replace a machines that cannot be repaired economically with a new identical machine. They need to evaluate the alternatives of leasing versus buying. The old machine is fully depreciated and will be discarded (no salvage value on it). The replacement machine, being identical , will not affect revenues nor costs (all maintenance for both alternatives will be done in-house). The new machine, with either option, will last four years and then be replaced. The purchased machine only will have the salvage value listed below. From a financial perspective, document and make a recommendation of which alternative should be adopted.

 

Purchase price $42,000 year 0
Salvage value $10,000 EOY 4
Lease expense $12,000 annually paid at the beginning of each year
Depreciation 5 MACRS years
Time span 4 years
Income tax rate 20.00%
Capital gains tax rate 10.00%
MARR 12.50%

 

 

Question 6

Josephine is trying to get a new company up and running. She needs to prepare financial documents to submit to a bank for a loan (line of credit) to cover the working capital requirements. She has a potential angel investor for the investment in machines and equipment so that is not part of the line of credit loan amount.

The estimated working capital needed for each of the first two years is shown below and the year 2 values are expected to be constant at the year 2 level in the future.

Interest on this line of credit should be ignored.

The revenue COGS, Gross margin and S.G.& A. (does not include depreciation) is shown below.

Prepare an Income Statement and Cash Flow Statement for years 0-2 that can be submitted to the bank (meaning that all subtotals should be shown). All available data is shown below. Assume that the company will continue with Josephine as the owner beyond year 2.

 

 

Investment in year 0 $10,00,000 Assume this entire amount is depreciable

Forecasted revenues, cost and expenses not including depreciation.

0 1 2

Revenue $6,50,000 $13,00,000

COGS ($2,60,000) ($5,20,000)

SG&A ($1,80,000) ($2,40,000)

Depreciation (MACRS) 5 year 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%

Accounts Receivable $0 $2,50,000 $4,00,000

Accounts Payable $20,000 $1,80,000 $1,80,000

Wages Payable$5,000 $50,000 $65,000

Inventory $10,000 $1,00,000 $1,50,000

Income Tax rate 20%

Capital Gains Tax rate 12%

 

Question 7

Below is an Income and cash flow statements that management has approved. (If there are errors or oversights, that is their problem, not yours). Column E contains the original starting values in case you need to get back to them.

a Determine the sensitivity of the present worth to four changes in COGS: a 20% decrease, a 10% decrease, a 10% increase, and a 20% increase.

b Determine the Unit Price that would achieve the MARR (PW = 0) when the unit COGS is $16.00 . Explain how you determined this.

c If the investment was increased to $2,000,000 to reduce the COGS each to $12.50, what would the unit price have to be to achieve a cash flow of $500,000 in year 1? Explain how you determined this.

 

Question 8

The Town of Greenburg has spent $1.5 million in the past year making its facilities more energy efficient. The next step is to evaluate alternative methods of heating. They presently use coal. The alternatives being evaluated are to switch to either natural gas, solar, or geothermal. The forecasted data below has been gathered for one building to make an evaluation. (Data are fictitious)

Perform a financial analysis to determine and indicate which one is preferred over coal.

Time span 10 years

MARR 7%

 

Investment Annual Fuel Cost Annual Operating Cost

Coal $0 $80,000 $18,000

Natural Gas $35,000 $80,000 $3,000

Solar $1,00,000 $2,000 $5,000

Geothermal $90,000 $1,000 $7,000

 

Question 9

The Retired Entrepreneurs Association for People (REAP) is funding projects for improving the grain supply in countries with food shortages. Their staff has obtained proposals as follows. Each proposal has a upfront investment, estimated costs per year, and an estimated tons of food that would be produced. Using a 10 year time span and a discount rate (MARR) of 7%, create a priority order in which the proposals should be funded. REAP will then attempt to raise funds for as many as possible.

Proposal Upfront Investment Annual Costs Annual Tons of food produced
P1 $140,00,000 $24,00,000 1,50,000
P2 $200,00,000 $27,00,000 1,40,000
P3 $170,00,000 $23,00,000 1,64,000
P4 $250,00,000 $22,40,000 1,55,000
P5 $100,00,000 $19,00,000 1,30,000
P6 $120,00,000 $20,00,000 1,44,000

 

 

Question 10

Your company was bought by a large corporation and you are now one of seven plants vying for investment funds. You are preparing a financial analysis for the adoption of a complex proposal to submit to a corporate investment committee. Prior to being purchased, your plant just summed the estimated labor savings and divided investment by it. The corporate policy states that a 5-year present worth analysis of cash flow is needed for investment proposals, of which your plant manager knows nothing. There will be other competing proposals at the corporate level , and your plant manager’s support and signature are needed. Write an explanation to the busy plant manager as to why the present worth approach should be used. This can be posted below or in a word document. Limit your answer to 300 words.

 




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