Grand Canyon FIn450 module 1 assignment problems-p 10-25 11-4 11-8 11-17 ans 11-25

p11-23

Relevant cash flows for a marketing campaign Marcus Tube, a manufacturer of

high-quality aluminum tubing, has maintained stable sales and profits over the past

10 years. Although the market for aluminum tubing has been expanding by 3% per

year, Marcus has been unsuccessful in sharing this growth. To increase its sales, the

firm is considering an aggressive marketing campaign that centers on regularly running

ads in all relevant trade journals and web sites and exhibiting products at all

major regional and national trade shows. The campaign is expected to require an

annual tax-deductible expenditure of $150,000 over the next 5 years. Sales revenue,

as shown in the accompanying income statement for 2015, totaled $20,000,000. If

the proposed marketing campaign is not initiated, sales are expected to remain at

this level in each of the next 5 years, 2016 through 2020. With the marketing

campaign, sales are expected to rise to the levels shown in the accompanying table

for each of the next 5 years; cost of goods sold is expected to remain at 80% of

sales; general and administrative expense (exclusive of any marketing campaign outlays)

is expected to remain at 10% of sales; and annual depreciation expense is expected

to remain at $500,000. Assuming a 40% tax rate, find the relevant cas

flows over the next 5 years associated with the proposed marketing campaign.

Marcus tube income statement for the year ended december 31 2015

Sales revenue 20,000,000

Less: Cost of goods sold (80%) 16,000,000

Gross profits $ 4,000,000

Less: Operating expenses

General and administrative expense (10%) $ 2,000,000

Depreciation expense 500,000

Total operating expense $ 2,500,000

Earnings before interest and taxes $ 1,500,000

Less: Taxes (rate 5 40%) 600,000

Net operating profit after taxes 900,000

Marcus tube sales forcast

Year Sales revenue

2016 $20,500,000

2017 21,000,000

2018 21,500,000

2019 22,500,000

2020 23,500,000

problem p10-25

All techniques with NPV profile: Mutually exclusive projects Projects A and B, of

equal risk, are alternatives for expanding Rosa Company’s capacity. The firm’s cost

of capital is 13%. The cash flows for each project are shown in the following table.

a. Calculate each project’s payback period.

b. Calculate the net present value (NPV) for each project.

c. Calculate the internal rate of return (IRR) for each project.

d. Draw the net present value profiles for both projects on the same set of axes, and

discuss any conflict in ranking that may exist between NPV and IRR.

p11-4

Sunk costs and opportunity costs Masters Golf Products, Inc., spent 3 years and

$1,000,000 to develop its new line of club heads to replace a line that is becoming obsolete.

To begin manufacturing them, the company will have to invest $1,800,000 in

new equipment. The new clubs are expected to generate an increase in operating cash

inflows of $750,000 per year for the next 10 years. The company has determined that

the existing line could be sold to a competitor for $250,000.

a. How should the $1,000,000 in development costs be classified?

b. How should the $250,000 sale price for the existing line be classified?

c. Depict all the known relevant cash flows on a time line.

p11-8

Book value and taxes on sale of assets Troy Industries purchased a new machine

3 years ago for $80,000. It is being depreciated under MACRS with a 5-year recovery

period using the percentages given in Table 4.2 on page 000. Assume a 40% tax rate.

a. What is the book value of the machine?

b. Calculate the firm’s tax liability if it sold the machine for each of the following

amounts: $100,000; $56,000; $23,200; and $15,000.

The company is liable for 29% of the taxes after 3 years.

p11-17

Incremental operating cash flows Richard and Linda Thomson operate a local lawn

maintenance service for commercial and residential property. They have been using

a John Deere riding mower for the past several years and believe that it is time to

buy a new one. They would like to know the incremental (relevant) cash flows

associated with the replacement of the old riding mower. The following data are

available:

There are 5 years of remaining useful life on the old mower.

The old mower has a zero book value.

The new mower is expected to last 5 years.

The Thomsons will follow a 5-year MACRS recovery period for the new mower.

Depreciable value of the new mower is $1,800.

They are subject to a 40% tax rate.

The new mower is expected to be more fuel efficient, maneuverable, and durable

than previous models and can result in reduced operating expenses of $500 per year.

The Thomsons will buy a maintenance contract that calls for annual payments

of $120.

Create an incremental operating cash flow statement for the replacement of Richard

and Linda’s John Deere riding mower. Show the incremental operating cash flow for

the next 6 years.