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2014_summer_final_exam.xls

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	TMAN 625 Final Exam, Summer 2014	Question	Score
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		2	0
		3	0
		4	0
Name		5	0
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		9	0
		10	0
		Late	0
		Total	0

Q1

Question 1					Score	0
	Awesome Gadget, INC is considering making an additional investment in its production capabilities. It has collected data on the past year's (year 0) revenue, costs and quantity sold. Future Sales quantities are forecasted to be as shown in the data block below.
	The price per unit will be increased $2.50 annually (year-1 unit price = year-0 unit price + $2.50, year-2 price = Year-1 price + $2.50, etc.)
	COGS per unit produced is forecast to decrease 5% annually (cost per unit in year-1 to be 5% less than the year-0 unit cost, year-2 unit cost will be 5% less than year-1, etc.)
	Fixed cost (S.G. & A.) excluding depreciation will be constant for all years. Depreciation for each year is to be as shown in the data block (does not have to be calculated).
	Using this data, prepare a three year proposal income statement (only) for years 1-3 using items from the following data block as needed. The income statement must be in the standard accounting sequence and format with appropriate totals.
	Years	0	1	2	3
	Revenue in year 0	$3,211,000.00
	COGS - year 0	$2,281,500.00
	Quantity produced/sold	84,500
	Forecasted sales quantities		95,100	106,400	100,000
	Working capital	$750,000.00	$720,000.00	$690,000.00	$650,000.00
	Depreciation	$540,000.00	$510,000.00	$460,000.00	$400,000.00
	Investment	$350,000.00
	S.G. & A.	$1,258,000.00
	Income Tax rate	14.00%
	MARR	20.00%
	Unit price increase	$2.50	annually
	Unit COGS decrease	5.00%	annually
Solution

Q2

Question 2					Score	0
An investment committee has narrowed down their investment decision to three proposals. Further information was collected on these three proposals and the investment amounts, estimated annual cash flows, and estimated salvage values are shown below. A MARR of 15% and a six year time-span is to be used. The committee only uses the IRR criterion.
Determine which one maximizes the financial worth of the company using the internal rate of return criterion.
	Proposal	Investment	Annual cash flow	Salvage in last year
	A1	($1,750,000)	$510,000	$80,000	19.38%
	A2	($1,550,000)	$480,000	$30,000	21.44%
	A3	($2,250,000)	$670,000	$75,000	20.06%
	MARR	Years
	15.0%	6
Solution

Q3

Question 3					Score	0
Customers-R-Us,INC is considering a $5 million investment that will have a useful life of 8 years, and sold in the eighth year for $750,000. It will be depreciated using 10-year MACRS (table is below).
a	Determine the depreciation for each year of the eight year life of the investment
b	Determine the book value at the end of the eight years.
c	Determine the capital gain or loss when sold in the eighth year.
d	If the capital gain tax rate is 10%, what will be the capital gains tax?
		0	1	2	3	4	5	6	7	8	9	10	11
	10 year MACRS		10.00%	18.00%	14.40%	11.52%	9.22%	7.37%	6.55%	6.55%	6.56%	6.55%	3.28%
Solution

Q4

Question 4					Score	0
Awesome Gadget, Inc. is considering a new expanded nation-wide marketing program. A proposal income statement and some additional data are shown below. (The figures are in thousands of dollars, but this need not be part of the calculations as it will not make any difference in the conclusion.)
This proposal does not require any assets that can be depreciated. Assume that the proposed $3,000 marketing program is all S.G.&A. expense and includes all additional the S.G. & A. expenses needed for the marketing program.
Accounts receivable is forecasted to be 30% of revenue in each year starting with year 1. Finished Inventory is forecast at 10% of revenue also starting in year 1.
Accounts Payable is forecast to be $1,000 in year 0 and 20% of the cost of goods sold in each year after year 0. Materials inventory is forecasted at $1,500 in year 0 and 15% of the cost of goods sold in the years after year 0.
Prepare a cash flow statement and determine the present worth.
Income Statement
	Year	0	1	2	3
	Sales due to marketing program		$10,500	$15,000	$25,000
	COGS		($6,000)	($7,500)	($12,000)
	Gross Margin		$4,500	$7,500	$13,000
	Marketing Program Expense		($3,000)	($3,000)	($3,000)
	EBIT		$1,500	$4,500	$10,000
	Income Taxes		($375)	($1,125)	($2,500)
	Net Income		$1,125	$3,375	$7,500
		year 0	Percent	of
	Accounts Receivable	$0	30%	Revenue
	Finished Inventory	$0	10%	Revenue
	Accounts Payable	$1,000	20%	COGS
	Materials Inventory	$1,500	15%	COGS
	Proposal annual cost	$3,000
	Proposal life span	3	years
	Income tax rate	25%	annually
	MARR	10%	annually (EAR)
Solution

Q5

Question 5					Score	0
Medical Miracles, INC. (MMI), a medical products distributor, is considering a proposal to establish an R&D group to study and recommend product innovations. They have a close association with customers and suspect that this offers them knowledge for improving products and for new products. The R&D group would add $500,000 in S.G.& A. expenses annually that is not depreciable. The R&D group would patent their developments and contract others to build them.
The proposal suggests that the cost of the new R&D group be covered by a 3% price increase in all products. It is further forecasted that this price increase would result in an immediate loss of 10% of sales revenues in year-1 from the year-0 level. Starting in year 2, it is forecast that the product innovations would result in year-over-year revenue increases as shown in row 10 below:
If the proposed changes are not implemented, revenues are expected to stay constant at the year 0 level.
COGS is 63% of revenue. S,G. & A. is presently $5 million annually and would not change if the proposal is not implemented. Total Working capital is forecasted at 25% of revenue. There would be zero annual working capital change if the proposal is not implemented.
Determine if the proposal is financially justified using the following data and a 5-year time span.
	Revenue in year 0	$20,000,000
	year	0	1	2	3	4	5
	Revenue change from previous year		-10%	5%	10%	15%	15%
	Revenue increase in year 2-5	15%
	COGS	63%	of revenues
	Present S.G. & A	$5,000,000
	R&D group cost	$500,000
	Income Tax Rate	15%
	MARR	10%
Solution

Q6

Question 6					Score	0
Smart Phone, Inc. (SPI) has found that annual increases in its sales have diminished to near zero (Note that this is the increases in sales that are near zero, not the actual sales). To get growth started again, it has been proposed to offer a "Not-so-smart" phone model. It would be priced at 60% of the current "Smart" model. The new phone would not have a camera, GPS capabilities and other capabilities that require special hardware/chips. It simply would be a good user-friendly wireless telephone.
A market research study determined that there indeed was a market for such a phone as a substantial number of users only use the telepone capibiltiies. It would be made to look much like the "Smart" version so people would not know which phone others were using. The downside is that it would result in a decrease in demand for the present "Smart" model.
Depreciation averages $600,000 annually (some assets bought, some sold) and this is not expected to change due to the proposal. If the "not-so-smart" phone was added, S.G.& A. would increase by $3,000,000 annually.
The cost to develop and introduce the 'Not-so-Smart" model would be $20 million in year 0. This is not depreciable as no additional assets will be needed to produce the new phone.
Determine if the $20 million investment is financially justified using a 3-year time span.
		Price	Forecasted annual revenue without proposal	Forecasted Annual Revenue with proposal	COGS percent of revenue	S.G.& A.
	"Smart" model revenue	$400	$75,000,000	$70,000,000	65%	$10,000,000
	"Not-so-smart" revenue	$240	$0	$25,000,000	40%	$3,000,000
	Depreciation	$600,000	no change if proposal implemented.
	Working capital- both	no change
	Depreciable assets	none
	Income tax rate	17%
	MARR	15%
	Investment in year 0	$20,000,000	not depreciable
Solution

Q7

Question 7					Score	0
Two alternative replacement machines are described below that are being considered to replace a current one that has no salvage value. The present machine must be replaced and the replacement will not have any effect on quantity produced or sold, revenue, or S.G.& A. (except depreciation). The cost of the replacement machine will be depreciated using 5-year MACRS. The project evaluation time span should be 6 years.
Machine A, while less expensive, only has a life span of 3 years Therefore it will have to be replaced at the end of year 3. Therefore its investment will be incurred both in year 0 and in year 3. Its salvage value will be received when replaced.
Machine B is more expensive but will last 6 years and has a lower annual operating costs.
All cost information is listed below. Performa a financial analysis to compare the alternatives.
	Data block
	MARR=	13.00%
	Income Tax rate	18.00%
	Capital Gains rate	15.00%
	Time span	6	years
	Machine	A	B
	Purchase Cost	$70,000	$150,000
	Salvage Value	$5,000	$30,000
	Annual COGS	$8,500	$5,000
	5-year MACRS	Year	1	2	3	4	5	6
		Percentage	20%	32%	19.20%	11.52%	11.52%	5.76%
Solution

Q8

Question 8					Score	0
Below is an Income and cash flow statements for a new product model that management has approved. (If there are errors or oversights, that is their problem, not yours). Both question parts a and b should start from the original data. The cells with a green background contain the original values and are shown only to assist you in reverting back to the original values if needed.
a	Note that the present worth is negative. Determine the Investment amount that would achieve the MARR. Describe how you determined this.
b	What would be the present worth if the price was increased to $37.99 in all years and this resulted in a 5% decline in the "Sales Quantity Forecast". (note that years 2-6 are all linked to year 1). Describe how you determined this.
			Copy of Original Values
	Sales quantity in Year 1	35,000	35,000
	Annual Sales Increase	20%	20%
	Unit Price (all years)	$35.99	$35.99
	COGS each	$12.50	$12.50
	S.G.& A.	$800,000	$800,000
	Income tax rate	35%	35%
	MARR	15%	15%
	Investment	$2,000,000	$2,000,000
	Years	0	1	2	3	4	5	6
	Sales Quantity Forecast		35,000	42,000	50,400	60,480	72,576	87,091
	Depreciation 5-year MACRS		20.00%	32.00%	19.20%	11.52%	11.52%	5.76%
	Book Value		$1,600,000	$960,000	$576,000	$345,600	$115,200	$0
	Income Statement	0	1	2	3	4	5	6
	Sales revenue		$1,259,650	$1,511,580	$1,813,896	$2,176,675	$2,612,010	$3,134,412
	Cost of goods sold		($437,500)	($525,000)	($630,000)	($756,000)	($907,200)	($1,088,640)
	Gross Margin		$822,150	$986,580	$1,183,896	$1,420,675	$1,704,810	$2,045,772
	General, Sales and Admin.		($800,000)	($800,000)	($800,000)	($800,000)	($800,000)	($800,000)
	Depreciation		($400,000)	($640,000)	($384,000)	($230,400)	($230,400)	($115,200)
	EBIT		($377,850)	($453,420)	($104)	$390,275	$674,410	$1,130,572
	Income tax		$132,248	$158,697	$36	($136,596)	($236,044)	($395,700)
	Net income		($245,603)	($294,723)	($68)	$253,679	$438,367	$734,872
	Cash Flow Statement
	Net Income		($245,603)	($294,723)	($68)	$253,679	$438,367	$734,872
	Add depreciation		$400,000	$640,000	$384,000	$230,400	$230,400	$115,200
	Investment	(2,000,000)
	Change in Working Capital		($125,965)	($25,193)	($30,232)	($36,278)	($43,534)	($52,240)
	Cash flow	($2,000,000)	$28,433	$320,084	$353,701	$447,801	$625,233	$797,832
		Present Worth =
		($588,875)
Solution

Q9

Question 9 (same model as in Q8 with some data changes and additions)					Score	0
Below is an Income and cash flow statements for a new product model that management has approved. Two scenarios besides the original forecast are listed below along with the probability of each occurring. The model uses links to the Original forecast only.
a	Determine the expected worth and expected internal rate of return for the three scenarios.
b	Write a sentence or two recommendation to management concerning the answer to part a.
		Original Forecast	Forecast X	Forecast Y
	Probability of occurrence	50%	25%	25%
	Sales quantity in Year 1	50,000	30,000	40,000	*
	Annual Sales Increase	20%	10%	25%	*
	Unit Price	$35.99	$35.99	$35.99
	COGS each	$12.50	$14.00	$12.00	*
	S.G.& A.	$800,000	$800,000	$800,000
	Income tax rate	35%	35%	35%
	MARR	15%	15%	15%
	Investment	$2,000,000	$2,500,000	$1,750,000	*
	Years	0	1	2	3	4	5	6
	Sales Quantity Forecast		50,000	60,000	72,000	86,400	103,680	124,416
	Depreciation 5-year MACRS		20.00%	32.00%	19.20%	11.52%	11.52%	5.76%
	Income Statement	0	1	2	3	4	5	6
	Sales revenue		$1,799,500	$2,159,400	$2,591,280	$3,109,536	$3,731,443	$4,477,732
	Cost of goods sold		($625,000)	($750,000)	($900,000)	($1,080,000)	($1,296,000)	($1,555,200)
	Gross Margin		$1,174,500	$1,409,400	$1,691,280	$2,029,536	$2,435,443	$2,922,532
	General, Sales and Admin.		($800,000)	($800,000)	($800,000)	($800,000)	($800,000)	($800,000)
	Depreciation		($400,000)	($640,000)	($384,000)	($230,400)	($230,400)	($115,200)
	EBIT		($25,500)	($30,600)	$507,280	$999,136	$1,405,043	$2,007,332
	Income tax		$8,925	$10,710	($177,548)	($349,698)	($491,765)	($702,566)
	Net income		($16,575)	($19,890)	$329,732	$649,438	$913,278	$1,304,766
	Cash Flow Statement
	Net Income		($16,575)	($19,890)	$329,732	$649,438	$913,278	$1,304,766
	Add depreciation		$400,000	$640,000	$384,000	$230,400	$230,400	$115,200
	Investment	(2,000,000)
	Change in Working Capital		($179,950)	($35,990)	($43,188)	($51,826)	($62,191)	($74,629)
	Cash flow	($2,000,000)	$203,475	$584,120	$670,544	$828,013	$1,081,487	$1,345,337
		Present Worth =	IRR
		$652,243	23.75%
Solution

Q10

Question 10	Score	0
The concepts of Benefit/Cost analysis and Cost effectiveness analysis have been highly touted as the primary financial analysis tools of the public sector. These tools can also be applied to the private sector especially for internal financial analysis decisions. Provide an example of how you would use each of these concepts in the public and private sectors. Limit your response to 75 words for each of the four examples. You can use a separate word document.