ACCT 001A Lecture Notes - Lecture 28: Moe Williams, Net Present Value
Get access
Related Documents
Related Questions
1. Understand how to use EXCEL Spreadsheet | |||||||
(a) Develop proforma Income Statement Using ExcelSpreadsheet | |||||||
(b) Compute Net Project Cashflows,NPV, and IRR | |||||||
(c) Developproblem-solving and critical thinking skills | |||||||
and make long-term investment decisions | |||||||
1) LifePeriod of the Equipment = 4 years | 8) Sales for first year (1) | $200,000 | |||||
2) Newequipment cost | $(200,000) | 9) Sales increase per year | 5% | ||||
3)Equipment ship & install cost | $(35,000) | 10) Operating cost (60% of Sales) | $(120,000) | ||||
4) Relatedstart up cost | $(5,000) | (as a percent of sales in Year 1) | -60% | ||||
5)Inventory increase | $25,000 | 11) Depreciation (Straight Line)/YR | $(60,000) | ||||
6) AccountsPayable increase | $5,000 | 12) Marginal Corporate Tax Rate (T) | 21% | ||||
7) Equip.salvage value before tax | $15,000 | 13) Cost of Capital (Discount Rate) | 10% | ||||
ESTIMATING Initial Outlay (Cash Flow, CFo, T= 0) | |||||||
CF0 | CF1 | CF2 | CF3 | CF4 | |||
Year | 0 | 1 | 2 | 3 | 4 | ||
Investments: | |||||||
1)Equipment cost | |||||||
2) Shippingand Install cost | |||||||
3) Start upexpenses | |||||||
Total Basis Cost (1+2+3) | |||||||
4) Net Working Capital | |||||||
Total Initial Outlay | |||||||
Operations: | |||||||
Revenue | |||||||
OperatingCost | |||||||
Depreciation | |||||||
EBIT | |||||||
Taxes | |||||||
Net Income | |||||||
Addback Depreciation | |||||||
Total Operating Cash Flow | XXXXX | XXXXX | XXXXX | XXXXX | |||
Terminal: | |||||||
1) Changein net WC | $- | $- | $- | $20,000 | |||
2) Salvagevalue (after tax) | Salvage Value Before Tax (1-T) | XXXXX | |||||
Total | XXXXX | ||||||
Project Net Cash Flows | $- | $- | $- | $- | $ | ||
NPV = | IRR = | Payback= | |||||
Q#1 | Would you accept the project based on NPV, IRR? | ||||||
Would you accept the project based on Payback rule if projectcut-off | |||||||
is 3years? | |||||||
Q#2 Impact of 2017 Tax Cut Acton Net Income, Cash Flows and | |||||||
Capital Budgeting (Investment ) Decisions | |||||||
(a) | Estimate NPV, IRR and Payback Period of the project if equipment isfully | ||||||
depreciated in first year and tax rate equalsto 21%. Would you | |||||||
accept or reject the project? | |||||||
(b) | As a CFO of the firm, which of the above two scenario(a) or (b) | ||||||
would you choose? Why? | |||||||
Q#3 How would you explain to your CEOwhat NPV means? | |||||||
Q#4 What are advantages anddisadvantages of using only Payback method? | |||||||
Q#5 What are advantages and disadvantages of usingNPV versus IRR? | |||||||
Q#6 Explain the difference between independent projectsand mutually exclusive projects. | |||||||
When you are confronted with Mutually Exclusive Projects and havecoflicts | |||||||
with NPV and IRR results, which criterion would you use (NPV orIRR) and why? *****SHOW WORK PLEASE !!!! |
Inglewood Inc. would like to purchase a specialized productionmachine for $3,500,000. The machine is expected to have a life ofthree years, and a salvage value of $200,000. Annual maintenancecosts will total $200,000. Annual material savings are predicted tobe $900,000. The company's required rate of return is 20percent.
36. Ignoring the time value of money, what is the net cashinflow or (outflow) resulting from this investment opportunity?
a. $2,300,000
b. $1,200,000
c. ($1,200,000)
d. ($2,300,000)
e. None of the answer choices is correct.
37. Roske Company is considering a project with an initialinvestment of $40,000 and annual cash inflows of $8,000 per yearfor seven years. The company's cost of capital is 12 percent.Factors for a 12 percent interest rate for seven years are shownbelow:
Future Value of $1 2.211
Present Value of $1 0.452
Future Value of an Annuity 10.089
Present Value of an Annuity 4.564
Using the net present value (NPV) to evaluate this proposal, thecompany should:
a. invest in the proposal since the NPV is36,512
b. reject the proposal since the NPV is($3,488).
c. reject the proposal since the NPV is($36,512).
d. invest in the proposal since the NPV is$3,488.
e. None of the answer choices is correct.
38. Miller Inc. had the following sales during 2016:
Quarter 1 | 10,000 units |
Quarter 2 | 11,000 units |
Quarter 3 | 14,000 units |
Quarter 4 | 12,000 units |
Miller expects sales in each quarter of 2013 to be 10% more thanthe respective quarters for 2016. If each unit sells for $110, whatamounts will appear as sales revenue in the quarterly sales budgetsfor 2013?
a. $990,000; $1,089,000; $1,386,000; $1,188,000
b. $1,100,000; $1,210,000; $1,540,000;$1,320,000
c. $1,421,750; $1,421,750; $1,421,750;$1,421,750
d. $1,210,000; $1,331,000; $1,694,000; $1,452,000
e. None of the answer choices is correct.
39.Alta Vista Company plans to sell 90,000 units in June and135,000 units in July. The companyâs policy is to keep 15% of thenext month's sales in ending inventory. If the ending inventory inMay was consistent with this policy, how many units should beproduced in June?
a. 110,250 units
b. 83,250 units
c. 96,750 units
d. 123,750 units
e. There is not enough information to answer thisquestion.
40. Fireside Inc. had sales as follows during 2016:
Quarter 1 | 15,000 units |
Quarter 2 | 15,500 units |
Quarter 3 | 18,000 units |
Quarter 4 | 16,000 units |
Fireside expects sales in each quarter of 2013 to be 15% morethan the respective quarters for 2016. If each unit sells for $40,what amounts will appear as sales revenue in the quarterly salesbudgets for 2013?
a. $690,000; $713,000; $828,000; $736,000
b. $741,750; $741,750; $741,750; $741,750
c. $540,000; $558,000; $648,000; $576,000
d. $600,000; $620,000; $720,000; $640,000
e. None of the answer choices is correct.