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Chip’s Home Brew Whiskey management forecasts that if the firmsells each bottle of Snake-Bite for $20, then the demand for theproduct will be 15,000 bottles per year. Whereas Sales will equalonly 89 percent of this amount if the price is raised 10 percent.Chip’s variable cost per bottle is $10, and the total fixed cashcost for the year is $100,000. Depreciation and amortizationcharges are $20,000, and the firm has a 30 percent marginal taxrate. Management anticipates an increased working capital need of$3,000 for the year. What will be the effect of a 10 percent priceincrease on the firm’s FCF for the year?

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Keith Leannon
Keith LeannonLv2
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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You are the General Manager at the Bicker, Slaughter, and Lynch Law Firm. There is an opportunity to buy out a small law firm that was just started by a young MBA/JD, and you believe the firm can be grown and become a lucrative part of your Firm. With help from your finance leader, you have estimated the following benefit streams for this new division:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Before Tax $(149,000) $0 $51,380 $88,760 $114,100 $129,780 $143,640 $167,300

Cash Flow

From Operations

After Tax Net Income

From Operations $(103,500) $(50,500) $36,700 $63,400 $81,500 $92,700 $102,600 $119,500

After Tax Cash Flow

From Operations $(85,600) $15,000 $48,600 $72,200 $95,550 $101,300 $125,200 $140,200

You estimate that the purchase price for this firm would be $200,000 and that additional net working capital would be needed in the amount of $60,000 in year 0, an additional $20,000 in year 2 and then $20,000 in year 5. BSL usually spend about $275,000 per year in advertising. If you make this acquisition, you would ask that advertising spending be increased by an incremental one-time amount of $50,000 in year 0 to publicize the firm’s expansion. Your finance leader has indicated that the firm has access to a credit line and could borrow the funds at a rate of 6%. He also mentions that when he runs project economics for capital budgeting (such as a new copier or a company car), he recommends a standard 10% rate discount, but the one other time they looked at an acquisition of a smaller firm, he used a 12% rate discount. Obviously you will want to select the most appropriate discount rate for this type of project.

At the end of 8 years, the plan will be to sell this division. The estimated terminal value (the sale and the return of working capital) is conservatively estimated to be $300,000 of after-tax cash flow help. Using the data that you need (and ignoring the extraneous information),

calculate the Nominal Payback, the Discounted Payback, the Net Present Value, and the IRR for this potential acquisition.

Discussion – in a Word Document in paragraph form, respond to the following:

1) From a purely financial (numbers) perspective, would you recommend this purchase to management? Why?

2) What are some of the non-financial elements that need to be considered for this proposal?

3) Assumptions in project economics can have a huge impact on the result. Identify 3 financial elements/assumptions in your analysis that would make this project not be financially attractive (e.g., answer this question: what would have to be true for this to be a bad investment?).

4) If you were the CEO, would you approve this proposal? Why or why not?

Show work in excel

yr1 yr2 yr3 yr4 yr5 yr6 yr7 yr8

before tax

cash flow from

operations

 $(149,000) $0 $51,380 $88,760 $114,100 $129,780 $143,640 $167,300

after tax

net income from

operations

 $(103,500) $(50,500) $36,700 $63,400 $81,500 $92,700 $102,600 $119,500

After tax

cash flow

from

operations

 $(85,600) $15,000 $48,600 $72,200 $95,550 $101,300 $125,200 $140,200

You estimate that the purchase price for this firm would be $200,000 and that additional net working capital would be needed in the amount of $60,000 in year 0,

an additional $20,000 in year 2

and additional monies of $20,000 in year 5.

BSL usually spend about $275,000 per year in advertising. If you make this acquisition, you would ask that advertising spending be increased by an incremental one-time amount of $50,000 in year 0 to publicize the firm’s expansion.

Your finance leader has indicated that the firm has access to a credit line and could borrow the funds at a rate of 6%.

He also mentions that when he runs project economics for capital budgeting (such as a new copier or a company car), he recommends a standard 10% rate discount.

But the one other time they looked at an acquisition of a smaller firm, he used a 12% rate discount.

Obviously you will want to select the most appropriate discount rate for this type of project.

At the end of 8 years, the plan will be to sell this division. The estimated terminal value (the sale and the return of working capital) is conservatively estimated to be $300,000 of after-tax cash flow help.

Using the data that you need (and ignoring the extraneous information),

calculate the Nominal Payback,

the Discounted Payback,

The Net Present Value,

and the IRR for this potential acquisition.

Discussion – in a Word Document in paragraph form, respond to the following:

1) From a purely financial (numbers) perspective, would you recommend this purchase to management? Why?

2) What are some of the non-financial elements that need to be considered for this proposal?

3) Assumptions in project economics can have a huge impact on the result. Identify 3 financial elements/assumptions in your analysis that would make this project not be financially attractive (e.g., answer this question: what would have to be true for this to be a bad investment?).

4) If you were the CEO, would you approve this proposal? Why or why not?

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