ACCT 421 Lecture 2: Copy of Laboratory #3
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2) | You have been asked toestimate the free cash flow for last year | |||||||
for Holton Holdings and have collected thefollowing information. | ||||||||
⢠The firm reported earnings before interest,taxes, depreciation and amortization of $ | ||||||||
350 million on its revenues of $ 1600 million. | ||||||||
⢠Depreciation and amortization charges amounted to$ 100 million and | ||||||||
capital expenditures were $ 200 million. | ||||||||
⢠Holton spent $ 100 million last year on researchand development in its software | ||||||||
division, following R&D expenditures of $ 60million (3 years ago), $ 75 million (2 years ago) | ||||||||
and $ 90 million (1 year ago) in the prior threeyears. | ||||||||
You believe that research expenditures have anamortizable life of 3 years. | ||||||||
⢠The working capital items for the last year andthe previous year are reported below. | ||||||||
Last Year | Year before last | |||||||
Cash | 100 million | 80 million | ||||||
Accounts Receivable | 80 million | 90 million | ||||||
Inventory | 150 million | 100 million | ||||||
Accounts Payable | 130 million | 110 million | ||||||
Short term Debt | 150 million | 130 million | ||||||
⢠The tax rate for the firm is 40%. | ||||||||
a. Estimate the value of the research asset of thefirm. | ||||||||
b. Estimate the operating income adjusted forR&D expenditures. | ||||||||
c. Estimate the free cash flows to the firm lastyear. |
The Johnson Research Organization, a nonprofit organization that does not pay taxes, is considering buying laboratory equipment with an estimated life of seven years so it will not have to use outsiders' laboratories for certain types of work. The following are all of the cash flows affected by the decision: Use .
Investment (outflow at time 0) | $ | 5,150,000 | |
Periodic operating cash flows: | |||
Annual cash savings because outside laboratories are not used | 1,460,000 | ||
Additional cash outflow for people and supplies to operate the equipment | 260,000 | ||
Salvage value after seven years, which is the estimated life of this project | 460,000 | ||
Discount rate | 15 | % | |
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Required:
Calculate the net present value of this decision. (Round PV factor to 3 decimal places.)
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