Business Finance Ch9 HW- Connect

We are evaluating a project that costs $1,950,000, has a 7-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 88,800 units per year. Price per unit is $38.49, variable cost per unit is $23.65, and fixed costs are $842,000 per year. The tax rate is 24 percent and we require a return of 12 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

(a) Best-case NPV Sales = (88800 x 1.10) x (38.49 x 1.10) Sales = 4,135,673.52 Variable costs = (88800 x 1.10) x 23.65^0.9 Variable costs = 2,079,118.80 Fixed costs = (842,000 x 0.9) Fixed costs = 757,800 Depreciation = 1950000/7 Depreciation = 278,571.43 EBIT = Sales - (VC + FC + Dep) EBIT = 4,135,673.52 - (2,079,118.80+757,800 278,571.43) EBIT = 1,020,183.29 Tax@24% = 244,843.99 Net income = EBIT -tax Net income = 1,020,183.29 - 244,843.99 Net income = 775,339.30 Net cashflow = Net income + dep Net cash flow = 775,339.30+278,571.43 Net cash flow = 1,053,910.73 Present value of cash inflow = 1,053,910.73 x PVFIA(12%,7yrs) Present value of cash inflow = 4,809,791.99 NPV = Present value of cash inflow - initial cashflow NPV = 4,809,791.99-1950000.00 NPV = 2,859,791.99 (b) Worst- case NPV Sales = (88800 x 1.10) x (38.49 x .9) Sales = 2,768,508.72 Variable costs = (88800 x 1.10) x 23.65^0.9 Variable costs = 2,079,118.80 Fixed costs = (842,000 x 1.10) Fixed costs = 926,200 Depreciation = 1950000/7 Depreciation = 278,571.43 EBIT = Sales - (VC + FC + Dep) EBIT = 2,768,508.72- (2,079,118.80+926,200 +278,571.43) EBIT = -515,381.51 Tax@24% = -123,691.56 Net income = EBIT -tax Net income = -515,381.51- 244,843.99 Net income = -391,689.95 Net cashflow = Net income + dep Net cash flow = -391,689.95+278,571.43 Net cash flow = -113,118.52 Present value of cash inflow = -113,118.52x PVFIA(12%,7yrs) Present value of cash inflow = -516,245.38 NPV = Present value of cash inflow - initial cashflow NPV = -516,245.38-1950000.00 NPV = -2,466,245.38

(a) Fill in the missing numbers in the following income statement: (Do not round intermediate calculations and round your answers to the nearest whole number, e.g. 32.) Sales = 629,500 Costs = 379,300 Depreciation = 130,900 EBIT = ? Taxes@23% = ? Net Income = ? b.What is the OCF? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g. 32.)c.What is the depreciation tax shield? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g. 32.)

(a) EBIT = 629,500 - (379,300+130,900) EBIT = 119,300 Tax@23% = 27,439 Net income = 119,300-27,439 Net income = 91,861 (b) OCF = 91,861 + 130,900 OCF = 222,761 (c) Depreciation tax shield = Depreciation expenses x Tax Rate Depreciation tax shield = 130,900 x 23% Depreciation tax shield = 30,107

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,410,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,710,000 in annual sales, with costs of $1,730,000. The project requires an initial investment in net working capital of $152,000 and the fixed asset will have a market value of $187,000 at the end of the project. Assume that the tax rate is 23 percent and the required return on the project is 9 percent. a. What are the net cash flows of the project each year? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) b. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

(a) Sales = 2710000 costs = (1730000) Depreciation = 2410000/3 Depreciation = (803333.33) EBT = 2710000 - (1730000 + 803333.33) EBT = 176666.67 Taxes@23% = 40,633.33 Net income = 176666.67 - 40,633.33 Net Income = 136033.33 OCF = 136033.33 + 803333.33 OCF = 939366.67 Year 0 cashflow = Initial investment + working capital Year 0 cashflow = (2410000) + (152000) Year 0 cashflow = -25620000 Year 1 cashflow = 939366.67 Year 2 cashflow = 939366.67 Year 3 cashflow = OCF + Recovery working cap + After tax salvage value Working cap = 152000 Recov work cap = (187000 x 23%) Recov work cap = 143990 Year 3 cashflow = 939366.67 + (143990 + 152000) Year 3 cashflow = 1235356.67 (b) NPV of multiple years -2562000/(1.09)^0 = -2562000 939366.67/(1.09)^1 = 861804.28 939366.67/(1.09)^2 = 790646.13 1235356.67/(1.09)^3= 953922.01 NPV = Sum of all the years NPV = 44,372.42

H. Cochran Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,290,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,790,000 in annual sales, with costs of $684,000. The project requires an initial investment in net working capital of $410,000, and the fixed asset will have a market value of $420,000 at the end of the project. a.If the tax rate is 21 percent, what is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to two decimal places, e.g., 32.16.) b.If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and round your answer to two decimal places, e.g., 32.16.)

(a) Year 0 cash flow = -2,700,000.00 Year 1 cash flow = 1,034,024.00 Year 2 cash flow = 1,087,500.00 Year 3 cash flow = 1,722,396.00 (b) NPV = 316,152.00

Automatic Transmissions, Inc., has the following estimates for its new gear assembly project: price = $1,120 per unit; variable cost = $340 per unit; fixed costs = $4.85 million; quantity = 75,000 units. Suppose the company believes all of its estimates are accurate only to within ±15 percent. What values should the company use for the four variables given here when it performs its best-case and worst-case scenario analysis? (Do not round intermediate calculations and enter your answers in dollars, not million, rounded to the nearest whole number, e.g., 1,234,567.)

Best Case Unit sales = 75000*(1+15%) =86250 Unit Price = 1120*(1+15%) = 1288 Unit Variable Cost = 340*(1-15%) = 289 Fixed Cost = 4850000*(1-15%) = 4122500 Worst Case Unit sales = 75000*(1-15%) =63750 Unit Price = 1120*(1-15%) = 952 Unit Variable Cost = 340*(1+15%) = 391 Fixed Cost = 4850000*(1+15%) = 5577500

H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,430,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,770,000 in annual sales, with costs of $1,790,000. Assume the tax rate is 24 percent and the required return on the project is 10 percent. What is the project's NPV? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Initial Investment = $2,430,000 Useful Life = 3 years Annual Depreciation = Initial Investment / Useful Life Annual Depreciation = $2,430,000 / 3 Annual Depreciation = $810,000 Annual Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax * Depreciation Annual Operating Cash Flow = ($2,770,000 - $1,790,000) * (1 - 0.24) + 0.24 * $810,000 Annual Operating Cash Flow = $980,000 * 0.76 + 0.24 * $810,000 Annual Operating Cash Flow = $939,200 Required return = 10% NPV = -$2,430,000 + $939,200/1.10 + $939,200/1.10^2 + $939,200/1.10^3 NPV = -$94,348.61

Kolby's Korndogs is looking at a new sausage system with an installed cost of $755,000. The asset qualifies for 100 percent bonus depreciation and can be scrapped for $105,000 at the end of the project's 5-year life. The sausage system will save the firm $223,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $75,000. If the tax rate is 25 percent and the discount rate is 8 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Initial cost of system = -755,000 Initial Net working cap = -75,000 Yr 1 Operating cost = 223,000 Depreciation(yr 1) = (755,000) Benefit before tax = 223,000 -755,000 Benefit before tax = -532,000 Tax@25% = -133,000 Net benefit = 532,000- 133,000 Net benefit = -399,000 OCF = -399,000 + 755,000 OCF = 356,000 Yr 2-4 Operating cost = 223,000 Depreciation(yr 1) = (0) Benefit before tax = 223,000 Tax@25% = 55,750 Net benefit = 223,000 - 55,750 Net benefit = 167250 OCF = 167250+ 0 OCF = 167250 Yr 5 Operating cost = 223,000 Depreciation(yr 1) = (0) Benefit before tax = 223,000 Tax@25% = 55,750 Net benefit = 223,000 - 55,750 Net benefit = 167250 OCF = 167250+ 0 OCF = 167250 After tax salvage value = 78,750 NWC recovered = 75,000 After tax Total Cashflow = 167250 + 78,750+75,000 After tax Total Cashflow = 321,000 Scrapped price = 105,000 Book value@5 yrs = 0 Gain on sale = 105,000 - 0 Tax on gain@25% = 26,250 After tax salvage value = 105,000 - 26,250 After tax salvage value = 78,750 Yr 0 -830,000/(1.08)^0 = -830,000 Yr 1 356,000/(1.08)^1 = 329629.63 Yr 2 167250/(1.08)^2 = 143389.92 Yr 3 167250/(1.08)^3 = 132768.44 Yr 4 167250/(1.08)^4 = 122933.74 Yr 5 321,000/(1.08)^5 = 218467.21 NPV = Sum NPV = 1,307,188.94 Very often, the book value of the equipment is zero, as it is in this case. If the book value is zero, the equation for the aftertax salvage value becomes: Aftertax salvage value = MV + (0 - MV)TC Aftertax salvage value = MV(1 - TC) We will use this equation to find the aftertax salvage value since we know the book value is zero. So, the aftertax salvage value is: Aftertax salvage value = $105,000(1 - .25) Aftertax salvage value = $78,750 Using the tax shield approach, we find the OCF for the project is: OCF = $223,000(1 - .25) + .25($755,000) OCF = $356,000 And the OCF for the remaining years of the project will be: OCF = $223,000(1 - .25) OCF = $167,250 Now we can find the project NPV. Notice we include the NWC in the initial cash outlay. The recovery of the NWC occurs in Year 5, along with the aftertax salvage value. NPV = -$755,000 - 75,000 + $356,000/1.08 + $167,250/1.082 + $167,250/1.083 + $167,250/1.084 + [($167,250 + 75,000 + 78,750)/1.085] NPV = $117,188.94

Consider a three-year project with the following information: initial fixed asset investment = $750,000; straight-line depreciation to zero over the 5-year life; zero salvage value; price = $40.03; variable costs = $28.79; fixed costs = $356,000; quantity sold = 95,000 units; tax rate = 22 percent. How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

OFC = [(P - v)Q - FC](1 - T) + TD OCF = [($40.03 - $28.79) × 95,000) - $356,000][1 - 0.22] + [($750,000/5) × 0.22] = $588,204 OFC when units are 95,001: OCF = [($40.03 - $28.79) × 95,001) - $356,000][1 - 0.22] + [($750,000/5) × 0.22] OCF = $588,212.77 Sensitivity = ($588,212.77 - $588,204) / (95,001 - 95,000) Sensitivity = $8.77

Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $23,900, and the company expects to sell 1,560 per year. The company currently sells 1,910 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,580 units per year. The old board retails for $22,300. Variable costs are 57 percent of sales, depreciation on the equipment to produce the new board will be $1,515,000 per year, and fixed costs are $3,050,000 per year. If the tax rate is 21 percent, what is the annual OCF for the project? (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)

Sale o new board = 23900 x 1560 Sale of new board = 37,284,000 Loss on existing sales = (1910-1580)x22300 Loss on existing sales = (7,359,000) Net sales = 37,284,000 + (7,359,000) Net Sales = 29,925,000 Variable cost = (17,057,250) Contribution = 12,867,750 Depreciation = (1,515,000) Fixed costs = (3,050,000) Taxable income = (8,302,750) Tax@21% = (1,743,578) + Depreciation = 1,515,000 Operating cashflows = 8,074,173

We are evaluating a project that costs $1,830,000, has a 6-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 88,600 units per year. Price per unit is $38.25, variable cost per unit is $23.45, and fixed costs are $830,000 per year. The tax rate is 25 percent, and we require a return of 9 percent on this project. a.Calculate the base-case operating cash flow and NPV. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b.What is the sensitivity of NPV to changes in the sales figure? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) c.If there is a 400-unit decrease in projected sales, how much would the NPV change? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) d.What is the sensitivity of OCF to changes in the variable cost figure? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) e.If there is a $1 decrease in estimated variable costs, how much would the OCF change? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Work shown here: https://gyazo.com/a9161e72f2319690405d44e38e9c6327 (a) Base-case OCF = $437,210 (a) Base-case NPV = 131,288.47 (b) NPV sensitivity = 49.794 (c) NPV change = -19,917.48 (d) OCF Sensitivity = -66,450 (e) OCF change = 66,450