| 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 | | | | | | | | - 0 |
| 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 | - 0 | - 0 | - 0 | - 0 | - 0 | - 0 | - 0 |
| CUMULATIVE CASH FLOWS | | - 0 | - 0 | - 0 | - 0 | - 0 | - 0 |
| THREE METHODS OF EVALUATION |
| PAYBACK | | | YEARS |
| INTERNAL RATE OF RETURN |
| NET PRESENT VALUE AT | 9.00% |
| NET PRESENT VALUE AT | 11.00% |
amyjhon2013
monarch_corporation_.xls
