FINA exam 3
The 'gold standard of investment criteria refers to
NPV
What is the amount of the operating cash flow for a firm with $313,675 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate
OCF = (313675 x (1-.35)) + 100000 =303888.75
tax shield approach
OCF = (Sales - Costs)(1 - T) + Depreciation*T
Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $900 at the end of the next three years and then $1400 per year for the three years after that. If the discount rate is 8% then what is the PI?
PI= (NPV+CF0)/CF0 = (183.48+5000)/5000 =1.0367
What is the internal rate of return for a project with an initial outlay of $10,000 that is expected to generate cash flows of $2,000 per year for 6 years?
PV=-10000 FV=0 PMT=2000 N=6 CPT I/Y= 5.47
the financing decision
Find the right kind of debt for your firm and the right mix of debt and equity to fund your operations
What is the net effect on a firm's working capital if a new project requires: $45,808 increase in inventory, $40,466 increase in accounts receivable, $35,000.00 increase in machinery, and a $46,003 increase in accounts payable? Round to nearest dollar amount.
Increase in Inventory: 45808 Increase in A/R: 40466 Increase in A/P: 46003 45808+40466-46003 =40271
The multiple IRR problem occurs when the signs of a project's cash flows change more than once. T/F
True
Projects that compete with one another so that the acceptance of one eliminates from further consideration all other projects that serve a similar function.
mutually exclusive
financial leverage means
high returns but also higher risks
mutually exclusive projects are
if the firm may only accept one project from a particular menu of options and must reject all other alternatives
What types of analyses do the BNSF strategic studies team conduct?
- discounted cash flow - sensitivity
advantages of NPV
- gives clear accept/reject decision - uses all cash flows - adjusts for risk (with discount rate) - adjusts for TVM
Identify which of these are the relevant cash flows when considering a capital budgeting project.
- lost rent from the retail facility - remodeling expenses for new store - increase in inventory - expected salvage value of manufacturing equipment
what are the advantages of payback period?
- measures liquidity, easy to communicate - does not require complex calculations - does not require discount rate
IRR Decision Rule
Accept the project if the IRR is greater than the discount rate reject if the IRR is less than the discount rate
You purchase a truck for $30,000 and depreciate it with the straight-line method to $10,000 book value after three years. If you actually sell of after the third year for $12,000 in salvage value then what is the after-tax salvage value? The tax rate is 20%.
After-tax salvage value = salvage value-T(salvage value - book value) = 12000-.2(12000-10000) = 12000-(.2)(2000) = 12000-400 = $11,600. The firm would end up paying tax of $400 on the salvage value of $12,000, so the after-tax salvage value would be $11,600.
Example: Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $900 at the end of the next three years and then $1400 per year for the three years after that. If the discount rate is 8% then what is the NPV? Should the firm accept or reject the project?
CF0=-5000 CO1=900 FO1=3 CO2=1400 FO2=3 I=8 CPT NPV= $183.48 NPV is positive so we accept the project
You are considering two mutually exclusive projects, A and B. Project A costs $700 and generates cash flows of $400 for 3 years. Project B costs $700 and generates cash flows of $100, $400, and $800 for the next three years. What is the IRR for each project? Which project has a higher NPV?
Project A: CF0=-700 CO1=400 CO2=400 CO3=400 IRR= 32.68% Project B: CF0=-700 CO1=100 CO2=400 CO3=800 IRR= 28.28% DIfference: CF0=0 CO1=300 CO2=0 CO3=-400 IRR=15.47%
Which of the following statements is correct? - The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales. - The degree of total leverage (DTL) is equal to the DOL plus the degree of financial leverage (DFL). - Arithmetically, financial leverage and operating leverage offset one another so as to keep the degree of total leverage constant. Therefore, the formula shows that the greater the degree of financial leverage, the smaller the degree of operating leverage. - For a given change in sales, the corresponding percentage change in net income could be more or less than the percentage change in operating income. - The degree of total leverage (DTL) is equal to the DFL divided by the degree of operating leverage (DOL).
The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales.
Libscomb Technologies' annual sales are $6,922,215 and all sales are made on credit, it purchases $3,313,432 of materials each year (and this is its cost of goods sold). Libscomb also has $581,092 of inventory, $547,364 of accounts receivable, and $469,836 of accounts payable. Assume a 365 day year.
inventory turnover= cost of goods sold "material"/inventory step 1 find inventory TO = COGS/inventory = 3313432/581092 = 5.702078 step 2 = 365/inventory period = 365/5.702078 =64.01
The degree of operating leverage has which of the following characteristics?
the DOL relates the change in sales to the change in net operating income
if the discount rate is greater than the IRR, the NPV will be
less than zero
generally, increases in leverage result in ___ return and ___ risk
increased; increased
Which of the following statements is correct for a project with a negative NPV?
the cost of capital exceeds the IRR
NPV profile
a graph of a project's NPV over a range of discount rates
operating cycle=
inventory period + accounts receivable period
disadvantages of NPV
- requires complex calculations - requires a lot of data (estimates all CF's and r) - dollar value is not always intuitive
advantages of IRR
-More intuitive than NPV -Gives a clear accept/reject decision for independent projects -Uses all Cash flows -Does not require a discount rate (for calculation) -Adjusts for TVM and therefore risk (in comparing to hurdle rate that adjusts for risk)
The disadvantages of the IRR period method is that it
-Requires complex calculations -Only works for normal cash flows -Requires a lot of data (estimates of all CFs)
disadvantages of IRR
-Requires complex calculations -Requires a lot of data (estimates of all CFs) -Only works for normal cash flows -Requires discount rate (for decision) -Does not always work for mutually exclusive projects
Jon Stevens, BNSF Vice President and Controller describes the capital spending process primarily as
-a means to ensure regulatory compliance -a balancing act that requires careful evaluation of the costs and benefits of each project
the capital budgeting process is (5 steps)
1) proposal generation 2) review and analysis 3) decision making 4) implementation 5) follow up
Compute the payback period for a project that requires an initial outlay of $153,425 that is expected to generate $40,000 per year for 9 years.`
153425/40000= 3.84
Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet demand for a new line of solar charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features; • The firm just spent $300,000 for marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $23,180,478 (excluding land, hint: land is not subject to depreciation). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) • The company's operating cost (not including depreciation) will equal 50% of sales. • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. • At t = 10, the project is expected to cease being economically viable and the factory (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes) .0
2600000+23180478 =
Suppose the capital budget in the lecture example worksheet in Video #11 was $100,000. What is the NPV of the best project(s)?
45000
Carlisle Transport had $4,641 cash at the beginning of the period. During the period, the firm collected $1,622 in receivables, paid $1,804 to supplier, had credit sales of $5,324, and incurred cash expenses of $500. What was the cash balance at the end of the period?
4641+1622-1804-500 =3959
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $36,878 2 40,000 3 20,000 4 10,000 Thereafter 0 Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $40,000 in plant and equipment that will be depreciated using the straight-line method over 5 years. The firm recently spent $2,000 on a study to estimate the revenues of the new product. The tax rate is 20%. What is the operating cash flow in year 1? Answer to nearest whole dollar amount.
???
Which of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project?
A decrease in the fixed costs
You are considering the following three mutually exclusive projects. The required rate of return for all three projects is 14%. Year A B C 0 $ (1,000) $(5,000) $(50,000) 1 $ 300 $ 1,700 $ 0 2 $300 $ 1,700 $15,000 3 $ 600 $1,700 $ 28,500 4 $300 $1,700 $ 33,000 What is the IRR of the best project? % terms to 2 decimal places w/o % sign
A: Present value of inflows=cash inflow*Present value of discounting factor (rate%,time period) =300/1.14+300/1.14^2+600/1.14^3+300/1.14^4 =1076.61 NPV=Present value of inflows-Present value of outflows =1076.61-1000 =$76.61(Approx) B: Present value of inflows =cash inflow*Present value of discounting factor (rate%,time period) =1700/1.14+1700/1.14^2+1700/1.14^3+1700/1.14^4=4953.31 NPV=Present value of inflows-Present value of outflows =4953.31-5000 =-46.69(Approx)(Negative) C: Present value of inflows=cash inflow*Present value of discounting factor (rate%,time period) =15000/1.14^2+28500/1.14^3+33000/1.14^4 =50317.35 NPV=Present value of inflows-Present value of outflows =50317.35-50000 =$317.35(Approx) Hence C is the best project having highest NPV. Let irr be x%At irr,present value of inflows=present value of outflows. 50,000=15000/1.0x^2+28500/1.0x^3+33000/1.0x^4Hence x=irr= 14.23(Approx)
Your firm currently produces stand-alone GPS trackers and communicators. You forecast that you will sell $150,000 of Mp3 players next year. However, your firm has plans to start producing smartphone-compatible GPS communicator devices as well. If you produce the smartphone devices then your projected sales will be $110,000 for stand-alone GPS devices and $70,000 for smartphone devices. Because the smartphone device includes a GPS communicator, you expect that some customers will not buy the stand-alone device if they also buy the smartphone device. What is the total increase in sales that you should consider for this project? What is the side effect for existing sales that should be considered?
Accepting the project will lead to total sales of $110,000+$70,000=$180,000 compared to only $150,000. Therefore the incremental sales are $30,000. The side effect is that stand-alone device sales will decrease from $150,000 to $110,000. The side-effect represents a decrease in sales of $40,000 for the existing product.
Davis Supply maintains an average inventory of 2,000 dinosaur skulls for sale to filmmakers. The carrying cost per skull per year is estimated to be $150.00 and the fixed order cost is $48. What is the economic order quantity (EOQ)? (Round to the nearest whole number.)
Annual Requirement =2,000 Buying cost per order =48 Carrying cost per unit per annum=150 Economic order quantity =(2Annual requirement(Buying cost per order/Carrying cost per unit per annum))^(½) =(2*2000(48/150))^(0.5) = 36
A corporation is contemplating an expansion project. The CFO plans to calculate the project's NPV by discounting the relevant cash flows (which include the initial up-front costs, the operating cash flows, and the terminal cash flows) at the corporation's cost of capital (WACC). Which of the following factors should the CFO include when estimating the relevant cash flows?
Any opportunity costs associated with the project.
From the NPV Profile it appears that we should get an NPV of $12,000.00 when the discount rate is zero, and NPV of zero when the discount rate is 33.130832%, and an NPV of about -$1,000 when the discount rate is 39%. Confirm that these are correct.
CF0 = -10000 CO1=2500 CO2=6500 CO3=3000 CO4=10000 when, I=0% CPT NPT= $12000 (when discount rate is 0, NPV will be the sum of the cash flows) when, I=33.130832% CPT NPV= -$0.00 when, I=39% CPT NPV= -$1041.36 (this is pretty close, considering the scale on the graph)
What is the equivalent annual cost for a project that requires a $50,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10%?
CF0 = -50,000 CO1 = -10,000 FO1 = 4 I = 10% CPT NPV = -81,698.65 PV = -81,698.65 N = 4 I = 10% CPT PMT = 25,773.54
Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $271 at the end of the next three years and then $1,351 per year for the three years after that. If the discount rate is 4.92% then what is the NPV?
CF0= -5000 CO1= 271 FO1= 3 CO2=1351 FO2=3 I=4.92% CPT NPV= 1070.68
Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $900 at the end of the next three years and then $1,400 per year for the three years after that. If the discount rate is 8% then what is the NPV?
CF0=-5000 CO1=900 FO1=3 CO2=1400 FO2=3 I=8% CPT NVP ????
A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $97,420,369 now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project's NPV?
CFO= -97420369 CO1= -20000000 FO1= 1 CO2= 80000000 FO2= 1 CO3= 90000000 FO3= 1 NPV I= 11% down arrow CPT NPV= 15298631.96
A project costs $1,000 and will return cash flows of $50 in year 1, $3,800 in year 2, and a cost of $ 2,900 in year 3. The NPV profile will be:
CFo=-1000 CO1=50 CO2=3800 CO3=-2900 when, I = 0 CPT NPV = -50.00 when, I = 7.390928 CPT NPV =$0.00 when, I = 20.92 CPT NPV = $0.01 (there is a small rounding error) The highest NPV appears to be at about 14%: when, I = 14 CPT NPV = $10.42.
What is the NPV of a project that costs $100,000.00 and returns $50,000.00 annually for three years if the opportunity cost of capital is 8.88%?
CFo=-100000 C01=50000 F01=3 I=8.88 CPT NPV: 26835.90
Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $900 at the end of the next three years and then $1400 per year for the three years after that. What is the IRR? If the discount rate is 8% then should the firm accept or reject the project?
CFo=-5000 CO1=900 FO1=3 CO2=1400 FO2=3 CPT IRR= 9.09%
Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $500,000 and its variable costs equal 60% of sales, so the company's current operating income is $700,000. The company's interest expense is $495,677. What is the company's degree of financial leverage (DFL)? Answer to 2 decimal places.
DFL=EBIT/(EBIT-Interest expense) Step 1: Find EBIT which is your "operating income" or sales-variable costs-operating costs. Operating income was given as: 700,000 so that is EBIT Step 3: DFL=700,000/(700,000-495677) =700,000/204323 = 3.43 Two decimal places
A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 40% of sales, while fixed cost will be $423,269. The first year's sales estimates are $1,250,000. Calculate the firm's degree of operating leverage (DOL). Answer to 2 decimal places.
DOL=(sales-variable costs)/(sales-variable costs -fixed costs) Step 1: Find variable costs: (40%)(1,250,000 sales estimate) =500,000 Step 2: (1,250,000-500,000)/(1,250,000-500,000-423269) =750,000/326713 = 2.295592768 = 2.30
Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $512,427 and its variable costs equal 60% of sales. The company's interest expense is $500,000. What is the company's degree of total leverage (DTL)? Answer to 2 decimal places.
DTL=(sales-variable costs)/(sales-variable costs-fixed costs-interest expense) Step 1: Find Variable Costs =(3,000,000)(60%) =1,800,000 Step 3: (3,000,000-1,800,000)/(3,000,000-1,800,000-512,427-500,000) =1,200,000/187573 = 6.397509236 = 6.40
You purchase a truck for $30,000 and depreciate it using the 3-year MACRS percentages. If you actually sell of after the third year for $12,000 in salvage value then what is the after-tax salvage value? The tax rate is 20%.
Depreciation expense for year i = (initial cost)(MACRS percentage for year i) Depreciation expense for year 1 = (30000)(0.3333) = $9,999 Depreciation expense for year 2 = (30000)(0.4444) = $13,332 Depreciation expense for year 3 = (30000)(0.1482) = $4,446 Accumulated depreciation = 9,999 + 13,332 + 4,446 = 27,777. Book value = initial cost - accumulated depreciation = 30,000 - 27,777 = $2,223 After-tax salvage value = salvage value-T(salvage value - book value) = 12000-.2(12000-2223) = 12000-(.2)(9777) = 12000-1955 = $10,045. The firm would end up paying taxes of $400 on the salvage value of $12,000, so the after-tax salvage value would be $11,600.
You purchase a fixed asset for $30,000. What is the depreciation expense in the first year, using the 3-year MACRS method? What is the depreciation tax shield in the first year if the tax rate is 20%?
Depreciation expense for year i = (initial cost)(MACRS percentage for year i) Depreciation expense for year 1 = (30000)(0.3333) = $9,999 (The MACRS percentages are rounded to 4 decimal places. The depreciation expense would actually be $10,000) Depreciation tax shield = T(depreciation expense) = .2(9,999) = $1,999.
OCF=
EBIT + Depreciation - Taxes
NPV assumes intermediate cash flows are reinvested at the cost of equity, while IRR assumes that they are reinvested at the cost of capital T/F
False
A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 37.19% of sales, while fixed cost will be $450,000. The first year's sales estimates are $1,298,279. Calculate the firm's operating breakeven level of sales. Answer to 2 decimal places.
Step 1: 1298279(37.19%) = 482829.9601 Step 2: sales-variable 1298279-482829.9601 = 815449.0399 contribution margin Step 3: contribution margin/sales = 815449.0399/1298279 = 0.6281 Step 4: fixed costs/number in step 3 =450,000/0.6281= $716446.4257 one decimal place
the steps of the capital budgeting process
Step 1: Personal generation Step 2: Review and analysis Step 3: Decision Making Step 4: Implementation Step 5: Follow-up
depreciation tax shield=
T(depreciation expense)
Mavericks Cosmetics buys $4,100,531 of product (net of discounts) on terms of 6/10, net 60, and it currently pays on the 10th day and takes discounts. Mavericks plans to expand, and this will require additional financing. If Mavericks decides to forego discounts, what would the effective percentage cost of its trade credit be, based on a 365-day year? Answer in % terms to 2 decimal places.
The firm pays on the 10th day. Effective cost of trade credit = [(1+(Discount rate/(1-Discount rate)))^(Total days/(Net days-Discount days)) -1] Effective cost of trade credit = [(1+(6%/(1-6%)))^(365/10) -1] Effective cost of trade credit = 856.83%
Twelve years ago your company paid $30,000 for a new truck. Last year the company paid $4,000 to repair the truck's engine. The truck has a book value of $15,000 and could probably be sold for that much. If used for the firm's next project, the truck will be used until it is worth nothing at all, and its book value will be depreciated to zero. What is the relevant cost of using the truck for the firm's next project?
The original price of $30,000 is not relevant. The $4,000 for the new engine is a sunk cost and can also be ignored. The $15,000 represents the opportunity cost of using the truck and should be considered as a relevant CF. Therefore, the relevant cost is $15,000.
Grill Master Johnnys is thinking about purchasing a new, energy-efficient grill. The grill will cost $53,000.00 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $11,750.00. The grill will have no effect on revenues but will save Johnny's $23,500.00 per year in energy expenses. The tax rate is 40%. The 3-year MACRS schedule: Year Depr % 1 33.33 2 44.45 3 14.81 4 7.41 What is the TCF in year 3?
Total Cash Flow = OCF + ATSVTCF in year 3 = (17,239.72 + 8,620.92) = 25,860.64
What is the profitability index for Project A with a cost of capital of 8%? Year--Project A--Project B 0 ($42,000.00) ($45,000.00) 1 $14,000.00 $28,000.00 2 $14,000.00 $12,000.00 3 $14,000.00 $10,000.00 4 $14,000.00 $10,000.00 5 $14,000.00 $10,000.00
Value of cash inflows at the present = ((14000/1.08)+(14000/(1.08)^2)+(14000/(1.08)^3)+(14000/(1.08)^4)+(14000/(1.08)^5) = (12962.96+ 12002.74+11113.65+10290.41+9528.16) = 55898 (Approx) Net value of cash outflow at the beginning =42000 Profitability index=[present value of future inflows / initial outflows] =[55898/42000] =1.33
NPV method of capital budgeting is based on the rule that
a project should be accepted if its NPV is positive - independent projects if projects are mutually exclusive, then the rule is to accept the project with the highest NPV
opportunity costs reflect
alternative projects and do represent incremental cash flows
the profitability index is
an alternative way to express the NPV for a project Instead of computing NPV as the cost of a project minus the present value of the cash inflows, the PI just takes a ratio of benefits to costs
sunk costs refer to
any cash flows that have already been incurred or that will still be incurred even if a project is rejected
a project is a term for
any long term activity that a firm does that requires a cost and generates cash flows
Gillstrap Promotions has projected the following values for the next three months: JanuaryFebruaryMarchSales$352,000$379,000$448,754Purchases on Trade Credit$218,000$240,000$260,000Cash Expenses$88,000$91,000$94,000Taxes, interest, and dividends$18,000$20,000$41,000Capital Expenditures$50,0000$25,000 All sales are credit sales with 40% collected in the month of sale, 50% collected the following month, and the remainder collected in the second month after the sale. Credit purchases are paid in 30 days and all other items require immediate payment. Compute the net cash inflow for March.
cash collections from sales = = 448754(.4)+379000(.5)+352000(.1) = 404201.60 ???
If a 20% reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis would suggest:
deemphasizing that variable as a critical factor.
straight line depreciation method
depreciation expense= (initial cost - salvage cost)/number of years
You purchase a fixed asset for $30,000 and it will be depreciated to a book value of $10,000 after three years. What is the depreciation expense in the first year? What is the depreciation tax shield in the first year if the tax rate is 20%?
depreciation expense= (initial cost- salvage value)/number of years =(30000-10000)/3 =6666.67 Depreciation tax shield= T(depreciation expense)) =.2(6666.67) =1333.33
What types of projects does the BNSF strategic studies team evaluate?
discretionary
a pro-forma income statement is an
estimated or forecasted income statement
the payback period method...
expresses the value of a project in terms of how much time it takes to breakeven or to recover the initial cost of a project
It should not usually be clear whether we are describing independent or mutually exclusive projects in the following chapters because when we only describe one project then it can be assumed to be independent T/F
false
Net present value (NPV) is a sophisticated capital budgeting technique; found by adding a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital. T/F
false
the dividend decision
if you cant find investments that make your minimum acceptable rate, return the cash to doners of your business
According to the article, "Sunk cost fallacy: Throwing good money after bad," how can banks limit losses from bad loans?
increase bank executive turnover
breakeven analysis is used to
indicate the level of operations necessary to cover all costs and to evaluate the profitability associated with various levels of sales also called cost volume profit analysis
Libscomb Technologies' annual sales are $5,070,085 and all sales are made on credit, it purchases $4,110,662 of materials each year (and this is its cost of goods sold). Libscomb also has $505,868 of inventory, $484,739 of accounts receivable, and $416,620 of accounts payable. Assume a 365 day year.
inventory turnover= cost of goods sold "material"/inventory step 1 find inventory TO = COGS/inventory = 4110662/505868 = 8.125958
the investment decision
invest in assets that earn a return greater than the minimum acceptable hurdle rate
___ results from the use of fixed-cost assets or funds to magnify returns to a firm's owners
leverage
the primary purpose of capital budgeting is to
maximize shareholders wealth
In theory, a firm should maintain financial leverage consistent with a capital structure that
maximizes the owners wealth
the optimal capital structure...
minimizes a firms weighted average cost of capital (WACC)
Libscomb Technologies' annual sales are $6,476,623 and all sales are made on credit, it purchases $3,373,577 of materials each year (and this is its cost of goods sold). Libscomb also has $586,511 of inventory, $548,136 of accounts receivable, and $452,855 of accounts payable. Assume a 365 day year. What is Libscomb's Operating Cycle (in days)?
operating cycle= inventory period +AR step 1 = COGS/inventory = 3373577/586511 = 5.751942 step 2 = 365/inventory TO = 365/5.751942 = 63.456829 step 3 = sales/receivables = 6476623/548136 = 11.815723 step 4 = 365/receivables TO = 365/11.815723 = 30.891042 step 5 find operating cycle = incentory period + receivables period = 63.456829 + 30.891042 = 94.347871 = 94.35
if the discount rate is less than the IRR, the NPV will be
positive
Libscomb Technologies' annual sales are $5,453,137 and all sales are made on credit, it purchases $4,438,622 of materials each year (and this is its cost of goods sold). Libscomb also has $507,663 of inventory, $535,660 of accounts receivable, and $412,720 of accounts payable. Assume a 365 day year. What is Libscomb's Receivables Turnover?
receivables TO = sales/accounts receivable step 1 =sales/AR = 5453137/535660 = 10.18
Libscomb Technologies' annual sales are $6,095,035 and all sales are made on credit, it purchases $4,203,300 of materials each year (and this is its cost of goods sold). Libscomb also has $538,650 of inventory, $1,475,000 of accounts receivable, and $1,400,000 of accounts payable. Assume a 365 day year. What is Libscomb's Receivables Period (in days)?
receivables period =365/receivables TO step 1 =sales/AR = 6095035/1475000 = 4.132227 step 2 = 365/ receivables TO = 365/4.132227 =88.33
IS formula
revenue -expenses ---- EBT (income ignore interest exp for now) -tax (assume flat tax) ---- NI +depreciation ----- OCF or operating cash flow each period
Your firm forecasts revenues of $80,000 next period and $50,000 in expenses. Depreciation expense is estimated to be $15,000 and the tax rate will be 20%. What are the forecasts for Net Income and Operating Cash Flow? There is no interest expense.
revenue= 80000 CGS= -50000 Depreciation= -15000 EBT= 15000 Tax @ 20%= -3000 NI= 12000 Depreciation= 15000 OCF= 15000 Net income is forecasted to be $12000 OCF is forecasted at $27000
after tax salvage value=
salvage value-T(salvage value - book value)
capital spending generally represents spending on fixed assets for a project
spending on fixed assets for a project
Libscomb Technologies' annual sales are $6,934,714 and all sales are made on credit, it purchases $4,444,610 of materials each year (and this is its cost of goods sold). Libscomb also has $538,014 of inventory, $549,131 of accounts receivable, and beginning and ending of year $438,089 and $432,957 accounts payables (respectively). Assume a 365 day year. What is Libscomb's Cash Cycle (in days)?
step 1 find inventory TO = COGS/inventory = 4444610/ 528014 = 8.417599 step 2 find inventory period = 365/inventory TO = 365/8.417599 = 43.361533 step 3 find receivables TO = sales/receivables = 6934714/549131 = 12.628524 step 4 find receivables period = 365/receivables TO = 365/12.628524 = 28.902823 step 5 find average AP = (beg+end)/2 = (438089 + 432957)/2 = (871046)/2 = 435523 step 6 find payable turnover = COGS/average ap = 4444610/435523 = 10.205225 step 7 find payable period = 365/payable TO = 365/10.205225 = 35.765992 step 8 find cash cycle = inventory period + receivable period - payable period = 43.361533 + 28.902823 - 35.765992 = 36.498364
independent projects are projects where
the acceptance of a project does not constrain the firm from engaging in any other projects
terminal cash flow is
the after tax non-operating cash flow occurring in the final year of a project. it is usually attributable to the liquidation of a project
the internal rate of return (IRR) is
the discount rate that gives an NPV of zero
leverage refers to
the effects that fixed costs have on the returns that shareholders earn
operating cash inflows are
the incremental after tax cash inflows resulting from the implementation of a project during its life
the operating breakeven point is
the level of sales necessary to cover all operating costs
capital budgeting is
the process of evaluating and choosing capital projects
the crossover rate is
the rate where we should switch from choosing one project to another
initial investment is
the relevant cash outflow for a proposed project at time zero
a multiple IRR problem occurs when
the signs of a projects cash flows change more than once
the operating cycle is
the time it takes to produce inventory, sell it, and to then collect this money from customers
operating leverage is
the use of fixed costs over variable costs
Net Present Value (NPV)
the value we get if we compute the present value of all future cash flows, plus we enter any cash flow that occurs at time 0 for most examples CF0 will be negative because it represents up front costs
Mahrouq Technologies buys $16,069,272 of materials (net of discounts) on terms of 4/30, net 60, and it currently pays within 30 days and takes discounts. Mahrouq plans to expand, and this will require additional financing. If Mahrouq decides to forego discounts and thus to obtain additional credit from its suppliers, calculate the nominal cost of that credit. Answer in % terms to 2 decimal places (no % sign).
total period = 60 days discount period = 30 days discount = 4% Assume 365 days in a yearNominal cost of credit= [ Discount% / (1 - Discount%) ] * [ 365 / (Total period - Discount period)] = [ 0.04 / (1 - 0.04)] [ 365 / (60 - 30)] = [ 0.04 / 0.96] [ 365 / 30] = 5.069444 Nominal cost of credit = 50.69 WRONG ???
The Internal Rate of Return (IRR) is the discount rate that equates the NPV of an investment opportunity with $0 T/F
true
The multiple IRR problem occurs when the signs of a project's cash flows change more than once. T/F
true
Capital rationing may be beneficial to a firm if it:
weeds out proposals with weaker or biased NPVs
A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $100 million now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project's IRR? % terms to 2 decimal places and without the % sign.
year 1 CF= -100000000 year 2 CF= -20000000 year 3 CF= 80000000 year 4 CF= 90000000 present value @ 11% year 1= -100000000 year 2= 18018018.02 year 3= 64929794.66 year 4= 65807224.32 NPV= 12719000.96 IRR= 15.95%
