COMPREHENSIVE CHAPTER 12 & 13 PROBLEMS


MONARCH CORPORATION IS GOING TO START A NEW PRODUCT LINE OF PRODUCTS IN A WHOLE NEW MARKET.

THE DATA FOR ANALYSIS IS PRESENTED BELOW:



COST OF THE EQUIPMENT NEEDED $200,000 FIVE YEAR PROPERTY LIFE FOR TAX DEPRECIATION

NEW WORKING CAPITAL NEEDS $50,000 WILL BE RECOVERED AT THE END OF THE THIRD YEAR

PROJECTED NEW REVENUES:

SALES PROBABILITY

$225,000 30%

$350,000 50%

$500,000 20%

COST OF GOOD SOLD 25% OF SALES

VARIABLE CASH COSTS 15% OF SALES

ANNUAL FIXED CASH COSTS:

RENT $50,000

CLEANING $20,000

MAINTENANCE & OTHER $20,000

TOTAL FIXED COSTS $90,000

EQUIPMENT DISPOSAL PROCEEDS $20,000 SALVAGE VALUE AT THE END OF YEAR 6

FIRM'S COST OF CAPITAL 9.00%

TAX RATE 30%

NOTE - WHEN COMPUTING TAX A NET LOSS FOR THE YEAR A POSITIVE TAX SAVINGS IS CREATED

SINCE THERE IS OTHER INCOME TAX ON OTHER INCOME TO OFFSET

DEPRECIATION RATES FOR TAX PURPOSES:

YEAR ONE 20.00%

YEAR TWO 32.00%

YEAR THREE 19.20%

YEAR FOUR 11.50%

YEAR FIVE 11.50%

YEAR SIX 5.80%

ASSUMPTIONS:

ALL CASH FLOWS IN YEARS 1-6 OCCUR AT THE END OF THE YEAR. ALL INITIAL CASH INFLOWS OR

OUTFLOWS OCCUR TODAY.

REQUIRED:

A. ASSUMING SALES ARE $225,000 COMPUTE THE PAYBACK, IRR AND NPV. FOR THE NPV COMPUTE

AT BOTH THE FIRM'S DISCOUNT RATE AND 11%, WHICH IS A 2% PREMIUM ADDED TO THE RATE.

B. COPY THE WHOLE WORKSHEET AND SOLUTIONS FOR PART A TO THE WORSHEET NAMED PART B,

AND REDO THE COMPUTATIONS BY CHANGING THE ANNUAL SALES TO $350,000.

C. COPY THE WHOLE WORKSHEET AND SOLUTIONS FOR PART A TO THE WORSHEET NAMED PART C,

AND REDO THE COMPUTATIONS BY CHANGING THE ANNUAL SALES TO $500,000.



Fill in all of the Cells below in Yellow using the information given above.



PART A

YEARS 0 1 2 3 4 5 6

INITIAL INVESTMENT (NO INCOME TAX AFFECTS)

COST OF THE EQUIPMENT NEEDED

WORKING CAPITAL NEEDS

TOTAL INITIAL INVESTMENT



ANNUAL OPERATING RECEIPTS

SALES

LESS COST OF GOODS SOLD

GROSS PROFIT

LESS VARIABLE COSTS

LESS FIXED COSTS

LESS DEPRECIATION

PROFIT BEFORE TAX

LESS INCOME TAX

PROFIT AFTER TAX

PLUS DEPRECIATION

TOTAL OPERATING CASH FLOWS



SALVAGE VALUE ON EQUIPMENT

PROCEEDS

LESS TAX BASIS OF EQUIPMENT:

COST

ACCUMULATED DEPRECIATION

TAX BASIS

GAIN ON SALVAGE

LESS TAX ON SALVAGE GAIN

NET PROCEEDS ON SALVAGE



RELEASE OF WORKING CAPITAL (NO TAX AFFECT)



TOTAL CASH FLOWS - - - - - - -

CUMULATIVE CASH FLOWS - - - - - -



THREE METHODS OF EVALUATION

PAYBACK YEARS

INTERNAL RATE OF RETURN

NET PRESENT VALUE AT 9.00%

NET PRESENT VALUE AT 11.00%
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