FIN
571 Week 3 Individual Homework
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Week 3 Homework & Solutions
Week 3 Individual Homework Submit
Through Gradebook In Excel
Proforma Cash Flows
I- The Martinsen Company is
considering the purchase of a chemical analysis machine. Although the
machine being considered will not produce any increase in sales revenues, it
will result in before tax the reduction of labor costs by $35,000 per
year. The machine has a purchase price of $100,000, and it would cost an
additional $5,000 to properly install this machine. In addition, to
properly operate this machine, inventory must be increased by $5,000.
This machine has an expected life of 10 years, after which it will have no
salvage value. Also, assume simplified straight line depreciation and
that this machine is being depreciated down to zero, a 34 percent marginal tax
rate, and a required rate of return of 15 percent.
- What is the initial outlay associated with this
project?
- What are the annual after tax cash flows associated
with this project, for years 1thru 9.
- What is the terminal cash flow in year 10.
- Should the machine be purchased? Ie Calculate NPV, IRR,
MIRR CPI & Discounted Payback
- NPV/IRR. A
new computer system will require an initial outlay of $20,000 but it will
increase the firm’s cash flows by $4,000 a year for each of the next 8
years. Is the system worth installing if the required rate of return is 9
percent? What if it is 14 percent? How high can the discount rate be
before you would reject the project?
- Proforma Cash Flows & Valuation. The Gordon Company is considering starting up a new
business line of paint. The equipment required to produce the paint
will cost $1,600,000. It will cost an additional $200,000 to ship,
install and prepare the equipment for operation. The cost of materials
in permanent working capital amount to $320,000. They anticipate
training expenditures of $30,000 that must be paid prior to operating the
equipment. Marketing representatives say that the company should be
able to produce and sell $1,200,000 per year. The cost of goods sold
are anticipated to be 30% of sales. Incremental labor costs are
$90,000 per year, maintenance costs are $25,000 per year and incremental
overheads are anticipated to be $50,000. You must calculate
depreciation. Miscellaneous costs aside from depreciation are
$42,000 per year. This project has a life of 10 years and they
estimate salvage value of the equipment at $160,000. The cost of
capital for Gordon is normally 10% but this particular project is out of
their normal expertise and they would like to add a 3% risk premium.
The corporate tax rate for Gordon is 30%.
- Determine Cash Flows
- Determine NPV, CPI, IRR, MIRR, DPBK
- Interpret your findings.
4- Find the Economic Order
Quantity given the following:
The Carry Company is a Midsized ATV
dealer in the West. He sells about 2,400 ATV’s a year. The cost of
placing an order with its supplier is $600, the inventory carrying costs are
$100 for each ATV, and the safety stock is 10 ATV’s. What is the
Economic Order Quantity?
5- Find the Effective Annual
Interest Rate given the following:
Max Payne is running a small
business and is considering offering the following trade terms to free up
cash: 2/10 net 40. What is the effective annual rate his customers
will pay if they do not take the discount?
Answers To Week 3 Problems
- Martinsen Solution
Answer:
Machine Cost
$100,000
Installation
$5,000
Inventory
$5,000
Total
$110,000
Depreciation is $105,000/10=$10,500
Proforma
Revenue
$35,000
Expenses
Depreciation
$10,500
Net Income
$24,500
Taxes @
34%
$8,330
NIAT
$16,170
Depreciation
$10,500
Cash
Flow
$26,670
0
1
Thru
9
10
Cash
Flows
($110,000)
$26,670
$26,670 $31,670
Terminal Value is $26,670 Plus
$5,000 Inventory = $31,670
NPV=$25,087
IRR = 20.69
CPI = 1.23
- NPV9% = $2139.28
NPV14% =
= –$1,444.54
The IRR is 11.81%. To confirm this
on your calculator, set PV = (-)20,000; PMT = 4000; FV = 0; n = 8, and compute
i. The project will be rejected for any discount rate above this rate.
Problem 3
PV
|
$2,824,647.80
|
NPV
|
$683,647.80
|
CPI
|
1.32
|
IRR
|
20%
|
MIRR
|
16%
|
DPBK
|
6.71564524
|
Problem 4
Economic Order Quantity = 169.7
Problem 5
EAR =45%
|
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