Monarch Corporation

PART A

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%