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1) A company's 'bottom line' or net income increases. Which of the following statements is most correct?
A)The only possible cause is that sales increased.
B) The only possible cause is that expenses dropped.
C) Either sales increased, expenses decreased, or both may have happened
D) The only possible cause is that both sales must have increased and expenses must have decreased at the same time.

2) A project will cost $15,000 in total investment. The cash flows are as follows: Year 1: $5,000; Year 2: $3,000; Year 3: $6,000; Year 4: $8,000; Year 5: $7,000. Assume the cash flows are distributed evenly throughout the year. Calculate the exact payback period.
A) 4 Years B) 3 Years C) 3.50 Years D) 3.13 Years

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Hubert Koch
Hubert KochLv2
28 Sep 2019

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Home Furnishings Express is expanding its product offerings to reach a wider range of customers. To do this, they must expand the showroom and buy new equipment.

The expansion project includes increasing the floor inventory by $430 and increasing its debt to suppliers by 70 percent of floor inventory. The company will spend $450 for a building contractor to expand the size of its showroom and $30 for new equipment. As part of the expansion plan, the company will be offering credit to its customers and thus expects accounts receivable to rise by $90. The new product will be sold for 4 years. The showroom and new equipment is being depreciated using the 5-year MACRS category (20, 32, 19, 12, 11, 6%). The new product should have annual sales of $200, $250, $200, $150, until the project ends in 4 years. The new product will reduce annual sales of existing products by $10, until the product ends in 4 years. The cost of goods sold is 50% for both new and old products. Whiles sales will adjust after the first year, the firm believes that working capital will only affect initial cash flows and that working capital will return to normal levels after the project ends.

Over the past year, Home Furnishings Express has spent $17 studying the market for the new product. The accountants estimate that store Overhead will increase due to the addition of new back office personnel. This overhead will equal 10% of increased sales. A sales commission to our sales personnel is 8% of sales. Annual Fixed costs will increase by $7. If we did not sell the new product, we could rent the space to a vendor for $30 per year for the four years. Additionally, our annual property taxes will increase by $6 due to the expansion. After 4 years, we plan to sell the company. We estimate that we will receive an extra $100 for the store due to the extra sale’s space and equipment. The firm’s tax rate is 30%. The cost of capital is 12%.

What is the Initial Cash flow, the year 2 operating cash flows, and the the terminal cash flows? Show your work with labels for partial credit.

Question 24 options:

Year 0 Cash Flows (3 points) = Year 2 Operating Cash Flows (4 points) = Terminal Cash Flows (I only want terminal cash flows, not total cash flows for year 4, 3 points) =

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Pantaloon Beer is considering opening a microbrewery near campus. To open the brewery, they must purchase $250 in equipment. Shipping of the equipment will cost $40 and installation of the equipment will be $30. Pantaloon will lease a building for $384 per year. The building will need modifications costing $100. Both the modifications and equipment are depreciated using the 5 year MACRS schedule. Pantaloon will operate the brewery for four years, and then expects to sell the brewery to an investor for $500 plus any working capital. The firm will have some one-time expenses in year 1 of $120, primarily licenses and legal fees. To operate the brewery, Pantaloon will need an increase in Inventory of $17, an increase of Accounts Receivables of $19, and will have an increase in Accounts Payable of $15. Working capital will be recovered when we sell the brewery.

Annual sales will begin at $600, the increase at $600 per year. Thus year 2 sales are $1200, year 3 are $1800 and year 4 are $2400. Cost of Goods Sold (excluding overhead, depreciation, and lease payments) are 60% of annual sales. To operate the company, executives and administrators must be hired, at an annual fixed cost of $500.

Over the past two years, Pantaloon has been testing the concept by using a contract brewer. Last year’s sales were $100 with a cost of goods sold of $120. 40% of the project financing will come from a three-year 6% annual coupon bond. The firm needs new equity investors to fund the expansion and Pantaloon has only been able to find one equity investor. This equity investor requires that the firm have audited financial statements. The outside investor gets to choose the auditor and the auditor would cost the company $30 per year. The firm’s tax rate is 30%. The cost of capital is 13%.

What are the Initial Cash Flows in Year 0?

What are the Operating Cash Flows in Year 2?

What are the Terminal Cash Flows in Year 4? (I want only Terminal Cash Flows, not operating cash flows in year 4)

PLEASE ONLY ANSWER QUESTION 1.6 - 1.11

Merafe Mining is evaluating the possibility of adding a new product line to its product mix. Because the exercise requires a detailed analysis of all possible risk scenarios or cases, EY was contracted to perform capital budgeting analysis for Merafe. The new machinery would cost Merafe an estimated amount of R200 000. A further R10 000 would be required for shipping charges and additional amount of R30 000 is estimated for installation of the new equipment.
Assume an economic life of 4 year for the machinery and the depreciation is based on MACRS 3-year class. Assume the following MACRS 3-year class depreciate rates:

year 1: 33.33%,

year 2: 44.45%,

year 3: 14.81%,

year 4: 7.41%.
The machinery is expected to have a salvage value of R25 000 after 4 years of use.
The new product line would generate incremental sales of 1 250 units per year for 4 years at an incremental cost of R100 per unit in the first year, excluding depreciation. Each unit can be sold for R200 in the first year. The sales price and cost are both expected to increase by 3% per year. Further, to handle the new line, the company’s net working capital would have to increase by an amount equal to 12% of sales revenues. Assume company’s tax rate of 40%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 10%.
1.2. What is Merafe’s depreciable basis? What are the annual depreciation expenses? (5)
1.3. Calculate the annual sales revenues and costs (other than depreciation). Why is it important to include inflation when estimating cash flows? (5)
1.4. Construct annual incremental operating cash flow statements. (5)
1.5. Estimate the required net working capital for each year, and the cash flow due to investments in net working capital. (3)
1.6. Calculate the after-tax salvage cash flow. (3)
1.7. Calculate the net cash flows for each year. Based on these cash flows and the average project cost of capital, what are the project’s NPV, IRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken? (10)
1.8. Perform a sensitivity analysis on the unit sales, salvage value, and cost of capital for the project. Assume each of these variables can vary from its base-case, or expected, value by +-10%, +-20%, and +-30%. Discuss the results. (8)
1.9. Assume that EY is confident of its estimates of all the variables that affect the project’s cash flows except unit sales and sales price. If product acceptance is poor, unit sales would be only 900 units a year and the unit price would only be R160; a strong consumer response would produce sales of 1 600 units and a unit price of R240. EY believes that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case).
Use the worst-, base-, and best-case NPVs and probabilities of occurrence to find the project’s expected NPV, standard deviation, and coefficient of variation. (5)
1.10. Assume that Merafe’s average project has a coefficient of variation in the range of 0.2 to 0.4. Would the new line be classified as high risk, average risk, or low risk? What type of risk is being measured here? (3)
1.11. Merafe typically adds or subtracts 3 percentage points to the overall cost of capital to adjust for risk. Should the new line be accepted? (3)

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