this data, prepare a three year proposal income statement (only) for years
1-3 using items from the following data block as needed. The income statement must be in the
standard accounting sequence and format with appropriate totals.|
investment committee has narrowed down their investment decision to three
proposals. Further information was
collected on these three proposals and the investment amounts, estimated
annual cash flows, and estimated salvage values are shown below. A MARR of 15% and a six year time-span is
to be used. The committee only uses
the IRR criterion.
which one maximizes the financial worth of the company
usingthe internal rate of return criterion.
|Customers-R-Us,INC is considering a $5 million investment that
will have a useful life of 8 years, and sold in the eighth year for
$750,000. It will be depreciated using
10-year MACRS (table is below).
depreciation for each year of the eight year life of the investment
||Determine the book
value at the end of the eight years.
||Determine the capital
gain or loss when sold in the eighth year.
||If the capital gain
tax rate is 10%, what will be the capital gains tax?
Gadget, Inc. is considering a new expanded nation-wide marketing
program. A proposal income statement
and some additional data are shown below.
(The figures are in thousands of dollars, but this need not be part of
the calculations as it will not make any difference in the conclusion.)
proposal does not require any assets that can be depreciated. Assume that the proposed $3,000 marketing
program is all S.G.&A. expense and includes all additional the S.G. &
A. expenses needed for the marketing program.
receivable is forecasted to be 30% of revenue in each year starting with year
1. Finished Inventory is forecast at
10% of revenue also starting in year 1.
Payable is forecast to be $1,000 in year 0 and 20% of the cost of goods sold
in each year after year 0. Materials
inventory is forecasted at $1,500 in year 0 and 15% of the cost of goods sold
in the years after year 0.
|Prepare a cash flow
statement and determine the present worth.|
|Medical Miracles, INC. (MMI), a medical products distributor, is
considering a proposal to establish an R&D group to study and recommend
product innovations. They have a close
association with customers and suspect that this offers them knowledge for
improving products and for new products.
The R&D group would add $500,000 in S.G.& A. expenses annually
that is not depreciable. The R&D
group would patent their developments and contract others to build them.
proposal suggests that the cost of the new R&D group be covered by a 3%
price increase in all products. It is
further forecasted that this price increase would result in an immediate loss
of 10% of sales revenues in year-1 from the year-0 level. Starting in year 2, it is forecast that the
product innovations would result in year-over-year revenue increases as shown
in row 10 below:
|If the proposed changes
are not implemented, revenues are expected to stay constant at the year 0
|COGS is 63% of
revenue. S,G. & A. is presently $5
million annually and would not change if the proposal is not
implemented. Total Working capital is
forecasted at 25% of revenue. There would be zero annual working capital
change if the proposal is not implemented.
|Determine if the proposal is financially justified using the
following data and a 5-year time span.
|Smart Phone, Inc. (SPI) has found that annual increases in its
sales have diminished to near zero
(Note that this is the increases in sales that are near zero, not the actual
sales). To get growth started again,
it has been proposed to offer a "Not-so-smart" phone model. It would be priced at 60% of the current
"Smart" model. The new phone
would not have a camera, GPS capabilities and other capabilities that require
special hardware/chips. It simply
would be a good user-friendly wireless telephone.
market research study determined that there indeed was a market for such a
phone as a substantial number of users only use the telepone capibiltiies. It
would be made to look much like the "Smart" version so people would
not know which phone others were using. The downside is that it would result
in a decrease in demand for the present "Smart" model.
|Depreciation averages $600,000 annually (some assets bought,
some sold) and this is not expected to change due to the proposal. If the "not-so-smart" phone was
added, S.G.& A. would increase by $3,000,000 annually.
|The cost to develop and introduce the 'Not-so-Smart" model
would be $20 million in year 0. This
is not depreciable as no additional assets will be needed to produce the new
if the $20 million investment is financially justified using a 3-year time
alternative replacement machines are described below that are being
considered to replace a current one that has no salvage value. The present machine must be replaced and
the replacement will not have any effect on quantity produced or sold,
revenue, or S.G.& A. (except
depreciation). The cost of the
replacement machine will be depreciated using 5-year MACRS. The project
evaluation time span should be 6 years.
A, while less expensive, only has a
life span of 3 years Therefore it will
have to be replaced at the end of year 3.
Therefore its investment will be incurred both in year 0 and in year
3. Its salvage value will be received
B is more expensive but will last 6 years and has a lower annual operating
cost information is listed below.
Performa a financial analysis to compare the alternatives.
is an Income and cash flow statements for a new product model that management
has approved. (If there are errors or
oversights, that is their problem, not yours). Both question parts a and b should start
from the original data. The cells with
a green background contain the original values and are shown only to assist
you in reverting back to the original values if needed.
||Note that the present
worth is negative. Determine the
Investment amount that would achieve the MARR. Describe how you determined this.
||What would be the
present worth if the price was increased to $37.99 in all years and this
resulted in a 5% decline in the "Sales Quantity Forecast". (note that years 2-6 are all linked to year
1). Describe how you determined this.
|Below is an Income and cash flow statements for a new product
model that management has approved.
Two scenarios besides the original forecast are listed below along with the probability
of each occurring. The model uses
links to the Original forecast only.
||Determine the expected
worth and expected internal rate of return for the three scenarios.
||Write a sentence or
two recommendation to management concerning the answer to part a.
concepts of Benefit/Cost analysis and Cost effectiveness analysis have been
highly touted as the primary financial analysis tools of the public
sector. These tools can also be
applied to the private sector especially for internal financial analysis
decisions. Provide an example of how you would use each of these concepts in
the public and private sectors. Limit your response to 75 words for each of
the four examples. You can use a
separate word document.