AFM211 Lecture Notes - Lecture 12: Swot Analysis, Cash Flow

Frozen Turkeys Scenario

Cost of Land $ 200,000

Cost of Buildings & Equipment $ 350,000

MACRS Class 20

Life of Project (Years) 5

Terminal Value of Land $ 300,000

Terminal Value of Buildings & Equipment $ 175,000

First year sales (pounds) 250,000

Price per Pound $3.50

Unit Sales Growth Rate 7.0%

Variable Costs as % of Sales 62%

Fixed Costs 75,000

Tax Rate 35%

WACC 10.0%

a. Prepare a statement of annual cash flows for years 0 through 5. Cash flows in year 0 are your expenses for building and land.

Sales growth is based on the annual growth rate in units.

Assume no changes in fixed or variable costs.

Depreciate the project cost for 5 years, with the cash flow in year 5 to include the terminal cash flow of ending the investment.

b. Calculate the NPV,

c. profitability index,

d. IRR,

e. MIRR,

f. payback and

g. discounted payback of the cash flows

h Using scenario manager find best case, worst case, base case of NPV based on sales in pounds, price per pound, and variable cost percent. Make sure to include scenario summary.

Suppose that you are approached with an offer to purchase an investment that will provide cash flows of $1,300 per year for 15 years. The cost of purchasing this investment is $9,200. You have an alternative investment opportunity, of equal risk, that will yield 9% per year. What is the NPV that makes you indifferent between the two options?

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10. The Claustrophobic Solution, Inc., a residential window and door manufacturer, has the following historical record of earnings per share (EPS) from 2011 to 2007:

The company’s payout ratio has been 60% over the last five years and the last quoted price of the firm’s share of stock was $12. Flotation costs for new equity will be 6%. The company has 32,000,000 of common shares of stock outstanding and a debt-equity ratio of 0.5.

If dividends are expected to grow at the same arithmetic average growth rate of the last five years, what is the dividend payment in 2012?

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11. The following are the company sales from 2000-2009

Fit an exponential trend curve to the data and

Calculate the projected sales in 2010,

2011,

2012.

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12. THE FINAL PROBLEM IS A CALCULATION PROBLEM with multiple parts

Frozen Turkeys Scenario

Cost of Land $ 210,000

Cost of Buildings & Equipment $ 325,000

MACRS Class 20

Life of Project (Years) 5

Terminal Value of Land $ 315,000

Terminal Value of Buildings & Equipment $ 170,000

First year sales (pounds) 250,000

Price per Pound $3.40

Unit Sales Growth Rate 7.5%

Variable Costs as % of Sales 65%

Fixed Costs 72,000

Tax Rate 33%

WACC 10.5%

a. Prepare a statement of annual cash flows for years 0 through 5. Cash flows in year 0 are your expenses for building and land.

Sales growth is based on the annual growth rate in units.

Assume no changes in fixed or variable costs.

Depreciate the project cost for 5 years, with the cash flow in year 5 to include the terminal cash flow of ending the investment.

b. Calculate the NPV,

c. profitability index,

d. IRR,

e. MIRR,

f. payback and

g. discounted payback of the cash flows

h Using scenario manager find best case, worst case, base case of NPV based on sales in pounds, price per pound, and variable cost percent. Make sure to include scenario summary.

1. A company anticipates a depreciation deduction of $70,000 in year 4 of a project. The company's tax rate is 40% and its discount rate is 12%. The present value of the depreciation tax shield resulting from this deduction is closest to:

A) $17,808

B) $29,000

C) $21,000

D) $13,356

2. (Ignore income taxes in this problem.) Nevland Corporation is considering the purchase of a machine that would cost $120,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $43,000. The company requires a minimum pretax return of 19% on all investment projects. The net present value of the proposed project is closest to:

A) $32,966

B) $26,376

C) $64,902

D) $30,040

3. (Ignore income taxes in this problem) The management of Elamin Corporation is considering the purchase of a machine that would cost $305,745 and would have a useful life of 9 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $51,000 per year. The internal rate of return on the investment in the new machine is closest to:

A) 9%

B) 11%

C) 12%

D) 10%

4. (Ignore income taxes in this problem.) The management of Solar Corporation is considering the following three investment projects:

Rank the projects according to the profitability index, from most profitable to least profitable.

A) M,N,L

B) L,N,M

C) N,L,M

D) N,M,L

5. (Ignore income taxes in this problem.) The management of Lanzilotta Corporation is considering a project that would require an investment of $368,600 and would last for 8 years. The annual net operating income from the project would be $66,000, which includes depreciation of $31,000. The scrap value of the project's assets at the end of the project would be $15,000. The payback period of the project is closest to:

A) 3.8 years

B) 2.6 years

C) 2.7 years

D) 4.0 years

6. Dunn Construction, Inc., has a large crane that cost $35,000 when purchased ten years ago. Depreciation taken to date totals $25,000. The crane can be sold now for $8,000. Assuming a tax rate of 40%, if the crane is sold the total after-tax cash inflow for capital budgeting purposes will be:

A) $7,400

B) $10,000

C) $8,800

D) $8,000