Corp Fin Final

A project is expected to create operating cash flows of $26,500 a year for four years. The fixed assets required for the project cost $62,000 and will be worthless at the end of the project. An additional $3,000 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 12 percent?

$17,396.31

Lee's Furniture just purchased $24,000 of fixed assets that are classified as 5-year MACRS property. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. What is the amount of the depreciation expense for the third year if the firm applies the new bonus method of depreciation?

0; all depreciation is taken in year one

The policy that a firm adopts for short term finance will have 2 elements:

1) the size of the firm's investment in CA - usually measured relative firm's total operating revenue a) flexible - may include: keeping large cash/ marketable securities, making large investments in inventory, or granting liberal credit terms (high accounts recc.) Costly but has highest future cash inflows. Risks carrying cost. b) restrictive - low cash/no marketable securities, low inventory, no credit/accounts recc. Risks shortage costs. 2) the financing of CA - usually measured as the proportion STD to LTD a) flexible - LT financing covers more than TA requirement (even at seasonal peaks). Will have extra cash. b) restrictive - LT does not completely cover ST financing musty make up the deficit. Ideal - ST assets financed with STD. LT assets with LTD. NWC= 0.

A project has estimated sales of 2,600 units at $15.40 per unit; variable costs per unit of $6.79, ± 3 percent; annual fixed costs of $17,500, ± 3 percent; and depreciation of $2,850 per year. The company bases its sensitivity analysis on the expected scenario. If a sensitivity analysis is conducted using a variable cost of $7, what will be the total annual variable costs?

18200

Southern Markets is considering a project with total sales of $17,500, total variable costs of $9,800, total fixed costs of $3,500, and estimated production of 400 units. The depreciation expense is $2,400 annually. What is the contribution margin per unit?

19.25

Brennan's Boats is considering a project which will require additional inventory of $128,000, will decrease accounts payable by $7,000, and will increase accounts receivable by $56,000. What is the initial net working capital requirement for this project?

191,000

The Mill Wheel is considering a project with a life of 3 years that will require $289,400 for fixed assets, $36,700 for inventory and $27,800 for accounts receivable. Short-term debt is expected to increase by $16,500. The fixed assets will be depreciated straight-line to a zero book value over 5 years. Ignore bonus depreciation. At the end of the project, the fixed assets can be sold for 20 percent of their original cost and the net working capital will return to its original level. The project is expected to generate annual sales of $275,000 and costs of $198,000. The tax rate is 21 percent and the required rate of return is 16 percent. What is the amount of the cash flow in the project's final year?

191,018

Wilson's Meats has fixed costs of $.60 for every pound of meat it sells given a sales level of 32,500 pounds. It charges $3.89 per pound while the variable cost per pound is $2.99. If depreciation is $16,400, what is the accounting profit break-even point?

39,889 pounds

Sunk costs

A cost that has already occurred. Is not included in cash flows

Net working capital

NWC = CA-CL fdsfds

Allocated cost

a cost that benefits multiple projects. Only viewed as a cash outflow if it is an incremental cost of the project. (Ignore if it will be done anyway).

3 important current liabilities

accounts payable expenses payable (wages and taxes) notes payable

If Lew's Steel Forms purchases $618,000 of new equipment, they can lower annual operating costs by $265,000. The equipment will be depreciated straight-line to a zero book value over its 3-year life. Ignore bonus depreciation. At the end of the three years, the equipment will be sold for an estimated $60,000. The equipment will require the company to hold an extra $23,000 of inventory over the 3-year period. What is the NPV if the discount rate is 14 percent and the tax rate is 21 percent?

−$7,014.54

Real options

The adjustment a firm can make after a project is accepted. Ignored by NPV. Option to Expand - Has value if demand turns out to be higher than expected Option to Abandon - Has value if demand turns out to be lower than expected Option to Delay

4 of the most important current assets on a balance sheet

cash and cash equivalents marketable securities accounts receivable inventory

The Meldrum Co. expects to sell 3,000 units, ± 15 percent, of a new product. The variable cost per unit is $8, ± 5 percent, and the annual fixed costs are $12,500, ± 5 percent. The annual depreciation expense is $4,000 and the sale price is $18 a unit, ± 2 percent. The project requires $24,000 of fixed assets which will be worthless when the project ends in six years. Also required is $6,500 of net working capital for the life of the project. The tax rate is 21 percent and the required rate of return is 12 percent. What is the net present value of the pessimistic scenario?

$10,146.18

Adept Co. is analyzing a proposed project with annual sales of 5,200 units, ± 6 percent; variable costs per unit of $11, ± 3 percent; fixed costs of $17,500 per year, ± 3 percent; and a sales price of $22 per unit, ± 2 percent. The annual depreciation expense is $4,200. What is the annual sales revenue under the optimistic case scenario?

$123,689

Monte Carlo Simulation

-probability simulation - Used to model the probability of different outcomes in a process that cannot easily be predicted due to the intervention of random variables - Used to understand the impact of risk and uncertainty in prediction and forecasting models 1.Specify the Basic Model 2.Specify a Distribution for Each Variable in the Model 3.The Computer Draws One Outcome 4.Repeat the Procedure 5.Calculate NPV

ST Financial Plan

1) unsecured bank borrowing - line of credit 2) secured borrowing - need security of A/R or inventory 3) other sources ST notes (commercial paper) Bank pays bill for a fee (banker's acceptance)

Marshall's purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for storing outdoor inventory. The lot was recently appraised at $610,000. The company now wants to build a new retail store on the site. The building cost is estimated at $1.1 million. What amount should be used as the initial cash outflow for this building project?

1,710,000

Walks Softly currently sells 14,800 pairs of shoes annually at an average price of $59 a pair. It is considering adding a lower-priced line of shoes that will be priced at $39 a pair. The company estimates it can sell 6,000 pairs of the lower-priced shoes annually but will sell 3,500 less pairs of the higher-priced shoes each year by doing so. What annual sales revenue should be used when evaluating the addition of the lower-priced shoes?

27,500

For this year, Wilbert's Cakes has costs of $187,400, depreciation of $32,700, interest expense of $14,800, dividends paid of $5,600, taxes of $17,600, and an operating cash flow of $101,900. What is the sales amount?

306,900

A project has these estimated values: sales quantity of 4,600 units ± 2 percent; variable cost per unit of $17, ± 3 percent; annual fixed costs of $46,900, ± 1 percent; annual depreciation of $17,300; and a sales price of $39 a unit, ± 10 percent. The company bases its sensitivity analysis on the expected scenario. What will be the operating cash flow for a sensitivity analysis based on a sales price of $35 a unit and a tax rate of 21 percent?

31,994

The Boat Works currently produces boat sails and is considering expanding its operations to include awnings. The expansion would require the use of land the firm purchased three years ago at a cost of $197,000 that is currently valued at $209,500. The expansion could use some equipment that is currently sitting idle if $7,500 of modifications were made to it. The equipment originally cost $387,500 five years ago, has a current book value of $132,700, and a current market value of $139,000. Other capital purchases costing $520,000 will also be required. What is the value of the opportunity costs that should be included in the initial cash outflow for the expansion project?

348,500

Angie's expects annual sales of 2,400 units, ± 3 percent, of a new product at a price of $59 a unit, ± 2 percent. The expected variable cost per unit is $27.20, ± 2 percent, annual fixed costs are $32,500, and depreciation is $4,400 per year. What is the total annual expense per unit under the pessimistic scenario? Ignore taxes.

43.59

The Meldrum Co. expects to sell 3,000 units, ± 15 percent, of a new product. The variable cost per unit is $8, ± 5 percent; annual fixed costs are $12,500, ± 5 percent; annual depreciation is $4,000; and the sale price is $18 a unit, ± 2 percent. What is the amount of the fixed cost per unit under the pessimistic scenario?

5.15

The projections for a new one-year project show sales of 8,500 units, ± 5 percent; variable costs per unit of $28.62, ± 3 percent; and fixed costs of $164,000, ± 3 percent. Depreciation is $62,000 and the tax rate is 23 percent. The sale price is $55 a unit, ± 2 percent. The company bases its sensitivity analysis on the expected scenario. What is the operating cash flow for a sensitivity analysis using total fixed costs of $170,000?

56,017.10

A project with a life of one year has earnings before interest and taxes of $5,750, fixed costs of $50,000, a selling price of $13 a unit, and a sales quantity of 11,500 units. Depreciation is $7,500. What is the variable cost per unit?

7.5

Sensitivity, Scenario, and Break-Even

Allows us to look behind NPV to see how stable our estimates are

Erosion or Synergy

Side effects of a project to other parts of the firm. erosion - a new product reduces sales of existing product synergy - a new product increases sales of existing products

Activities that increase cash (sources of cash)

increase equity increase current liabilities increase long-term debt decrease inventory or other non-cash CA decrease fixed assets

Cash Budgeting

records estimates of cash receipts and disbursements Beg AR - Cash use = Net CF Net CF +/- Cash Excess - Min Balance = cumulative surplus/deficit requirement

Yield to Maturity

the interest rate that equates the present value of cash flows and par value with its value today

Opportunity costs

the most valuable alternative that is given up if a particular investment is undertaken. The discount rate is the opportunity interest rate.