Finance 10 QS

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	Question	Score
	1	0
	2	0
	3	0
	4	0
Name	5	0
	6	0
	7	0
	8	0
	9	0
	10	0
	Late	0
	Total	0

Q1

Question 1					Score	0
	Awesome Gadget, INC is considering making an additional investment of in its production capabilities. It has collected data on the current year's (year 0) revenue, costs and quantity sold.
	The price per unit will be decreased 10% annually (year-1 unit price will be 10% less than the present (year 0) price, etc.)
	COGS per unit produced is forecast to decrease 5% annually (cost per unit in year-1 will be 5% less than the present unit cost, etc.)
	Fixed costs will increase due to a new salaried technician in all years. No other change is forecast for S.G.& A. Depreciation and working capital for each year are to be as shown in the data block.
	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 contain appropriate subtotals and totals.
	Years	0	1	2	3
	Unit Price	$199.00	179.1	161.19	145.071
	Annual % price decrease	10.00%
	Unit COGS	$107.50	102.125	97.01875	92.1678125
	Annual % COGS decrease	5.00%
	New salaried technician		$100,000	$110,000	$120,000
	Investment	$350,000
	Forecasted sales quantities		340,000	540,000	1,000,000
	Working capital	$750,000	$775,000	$725,000	$675,000
	Depreciation		$510,000	$460,000	$400,000
	Income Tax rate	14.00%
	Capital Gains tax rate	10.50%
	MARR	20.00%

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.
Determine which one maximizes the financial worth of the company using the internal rate of return criterion only. Use a MARR of 15% and a three year time horizon The committee only considers the IRR criterion.
	Proposal	Investment	Year 1	Year 2	Year 3	Salvage in last year
	A1	($1,250,000)	$970,000	$640,000	$250,000	$300,000
	A2	($1,050,000)	$480,000	$500,000	$600,000	$350,000
	A3	($1,750,000)	$650,000	$700,000	$800,000	$750,000
	MARR	15.0%
	Years	3

Q3

Question 3			Score	0
Customers-R-Us, LLC had sales and costs as shown below in 2013. Any data that is not listed should be considered as zero. Note that the parts are produced in lots of 10,000, so the setup costs are incurred each time that 10,000 parts needs to be produced.
a	What total costs (variable plus fixed) will be incurred in 2013?
b	What profit will be achieved in 2013
c	What is the break even quantity in 2013?
d	If the quantity, fixed cost and the variable costs stay the same and only the price is changed, what price would have to be charged to earn profits of $250,000?
		2013
	Sold units	30,000
	Unit Price	$23.50
	Material Cost each	$1.75
	Labor cost each	$4.25
	Lot size	10,000
	Setup cost per lot	$500.00
	Annual Fixed Cost	$450,000

Q4

Question 4					Score	0
Awesome Gadget, Inc. is considering a new internal quality improvement program called ISO-9001. A proposal income statement and some additional data are shown below.
Benefits are expected in three area. The ISO-9001 registration should increase sales. Total COGS is expected to stay constant even though sales increases. And the improved quality will enable a decrease in inventory. These are defined below.
This proposal with require a one-time investment in record keeping software, added staff in all years, and substantial training expenses in year 1 and smaller amounts in later years. The software is to be depreciated using straight line depreciation over 3 years ( salvage value and book value in year 3 is zero). The other costs of the implementation will be expensed as S.G.& A.
The expected balances for the various working capital categories are listed below.
The Income statement is shown below. Determine the present worth and internal rate of return for the ISO-9000 proposal.
	Year	0	1	2	3
	Software Investment	$360,000
	Depreciation		$120,000	$120,000	$120,000
	Forecasted sales revenue		$300,000	$400,000	$600,000
	Added staff		$150,000	$150,000	$150,000
	Training		$300,000	$50,000	$20,000
	Total Inventory	$410,000	$365,000	$335,000	$315,000
	Total Accounts Receivable	$650,000	$620,000	$580,000	$530,000
	Total Accounts Payable	$580,000	$565,000	$545,000	$520,000
	Proposal life horizon	3	years
	Income tax rate	25%	annually
	Capital Gains tax rate	15%
	MARR	10%
Income Statement for changes
	Year	0	1	2	3
	Sales Increase		$300,000	$400,000	$600,000
	COGS Change		$0	$0	$0
	Gross Margin		$300,000	$400,000	$600,000
	Increased Staff		($150,000)	($150,000)	($150,000)
	Training		($300,000)	($50,000)	($20,000)
	S.G.& A.		($450,000)	($200,000)	($170,000)
	Depreciation		($120,000)	($120,000)	($120,000)
	EBIT		($270,000)	$80,000	$310,000
	Income Taxes		$67,500	($20,000)	($77,500)
	Net Income		($202,500)	$60,000	$232,500

Q5

Question 5					Score	0
Medical Miracles, INC. (MMI), a medical products distributor, is considering a proposal to make an acquisition of another company for $50 million. This acquisition would increase their gross margin by 40% over their present gross margin. SG&A would increase by 30% with the acquisition. A one time increase in working capital of $1,250,000 would immediately be needed (year 0). Assets worth $30 million that came with the acquisition could be depreciated using 10-year MACRS. The income and cash flow statements without the acquisition are shown below.
To simplify things a little, assume that the book value and salvage value at the end of year 5 are zero. (therefore there would be no gain to be taxed).
Determine if the proposal is financially justified using the following data and a 5-year time horizon.
	Price of company	$50,000,000
	Depreciable assets	$30,000,000	of purchased company
	Gross Margin increase	40%	in all years
	S.G.& A. Increase	30%	in all years
	Working Capital Increase	$1,250,000	year 0
	Income Tax Rate	13.5%
	MARR	15%
	10-year MACRS
	Year	0	1	2	3	4	5	6	7	8	9	10	11
	Percentage		10.00%	18.00%	14.40%	11.52%	9.22%	7.37%	6.55%	6.55%	6.56%	6.55%	3.28%
	Depreciation		$3,000,000	$5,400,000	$4,320,000	$3,456,000	$2,766,000	$2,211,000	$1,965,000	$1,965,000	$1,968,000	$1,965,000	$984,000
	Book value		$27,000,000	$21,600,000	$17,280,000	$13,824,000	$11,058,000	$8,847,000	$6,882,000	$4,917,000	$2,949,000	$984,000	$0
Present
	Income Statement if company not acquired
	Years	0	1	2	3	4	5
	Revenue		$100,000,000	$112,000,000	$125,440,000	$140,492,800	$157,351,936
	COGS		($65,000,000)	($72,800,000)	($81,536,000)	($91,320,320)	($102,278,758)
	Gross margin		$35,000,000	$39,200,000	$43,904,000	$49,172,480	$55,073,178
	S.G.&A.		($10,000,000)	($11,000,000)	($12,000,000)	($13,000,000)	($14,000,000)
	EBIT		$25,000,000	$28,200,000	$31,904,000	$36,172,480	$41,073,178
	Income Tax		($3,375,000)	($3,807,000)	($4,307,040)	($4,883,285)	($5,544,879)
	Net Income		$21,625,000	$24,393,000	$27,596,960	$31,289,195	$35,528,299
	Cash Flow Statement if company not acquired
	Years	0	1	2	3	4	5
	Net Income		$21,625,000	$24,393,000	$27,596,960	$31,289,195	$35,528,299
	Depreciation		$0	$0	$0	$0	$0
	Change in working capital		$0	$0	$0	$0	$0
	Investment	$0
	Cash flow	$0	$21,625,000	$24,393,000	$27,596,960	$31,289,195	$35,528,299

Q6

Question 6					Score	0
Superb Smart Phones, Inc. (SSP) is evaluating whether to lease a new machine that will enablea decrease in COGS of $150,000 annually. There will be no changes in S.G. & A. expenses except for the lease expenses of the new machine. A 3-year analysis has been requested using a MARR of 18% effective annual rate,
The new machine can be leased for $10,000 monthly with the lease payment due at the beginning of each month. All training will be done in year 1 and is budgeted at $50,000. The present machines are fully depreciated and have zero salvage value.
Income and capital gains tax rates are 15%. The depreciation should use 5-year MACRS. Proposals are evaluated using a MARR of 18% (EAR), which should also be used for rate conversions.
Analyze whether the proposal for the new machine is financially justified using 3-year time horizon.
	Monthly lease cost	$10,000	Beginning of month
	Revenue	$150,000
	Training in year 1	$50,000
	Tax rate	15%
	MARR	18.00%	EAR
	MACRS 5-year	Year	1	2	3	4	5	6
		Percentage	20.00%	32.00%	19.20%	11.52%	11.52%	5.75%

Q7

Question 7					Score	0
Perfect Production Parts (PPP) has a machine that no longer can produce perfect parts and must be replaced. Two quotes have been received. The replacement of the machine will not have any effect on quantity produced or sold, revenue, nor S.G.& A. (except depreciation). The cost of the replacement machine will be depreciated using 5-year MACRS.
Machine A costs $110,000 and this vendor will pay $10,000 for the present machine (in year 0). It is forecasted that COGS with this machine will be $24,000 annually. Machine A has an estimated value of $20,000 at the end of year 4 although it would most likely not be sold.
Machine B costs $135,000 but has a lower annual operating costs. It is forecasted that COGS with this machine will be $17,500 annually. This vendor will pay $15,000 for the present machine in year 0. Machine B has an estimated value of $25,000 at the end of year 4 although it would most likely not be sold.
The present machine is fully depreciated and therefore has a book value of zero.
Perform a 4-year financial analysis using a MARR of 13% and suggest which of the two alternative should be chosen.
	Data block
	MARR=	13.00%
	Income Tax rate	18.00%
	Capital Gains tax rate	15.00%
	Proposal Time horizon	4	years
	Machine	A	B
	Purchase Cost	$110,000	$135,000
	Annual COGS	$24,000	$17,500
	Present Machine payment	$10,000	$15,000
	Salvage Value	$20,000	$25,000
	5-year MACRS	Year	1	2	3	4	5	6
		Percentage	20.00%	32.00%	19.20%	11.52%	11.52%	5.75%
	Sales value after 4 years	$ 25,000.00
	Book Value	$ 23,328.00
	Capital Gain	$ 1,672.00
	Capital Gain taxes	$ 250.80
	Machine B should be preferred over Machine A as it has the lower negative present worth.

Q8

Question 8				Score	0
Due to the budget sequester, the bridge department had their repair budget reduced for the coming year. The cost of repair for several bridges needing repair are shown below. Also shown is the average number of cars per day that travel over each bridge. If the bridge department only has sufficient resources to repair one bridge per year, which one should be repaired first from a cost effectiveness perspective.
	Bridge	Repair Costs	Average Cars per day
	Washington	$2,400,000	1600
	Adams	$2,700,000	1500
	Jefferson	$2,300,000	1740
	Madison	$2,240,000	1550
	Jackson	$2,000,000	1440

Q9

Question 9					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 in the data block only.
a	Determine the expected worth and expected internal rate of return for the three possible 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	40%	25%	35%
	Sales quantity in Year 1	40,000	35,000	45,000
	Annual Sales Increase	20%	10%	25%
	Unit Price	$38.88	$38.88	$38.88
	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		40,000	48,000	57,600	69,120	82,944	99,533
	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		$1,555,200	$1,866,240	$2,239,488	$2,687,386	$3,224,863	$3,869,835
	Cost of goods sold		($500,000)	($600,000)	($720,000)	($864,000)	($1,036,800)	($1,244,160)
	Gross Margin		$1,055,200	$1,266,240	$1,519,488	$1,823,386	$2,188,063	$2,625,675
	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		($144,800)	($173,760)	$335,488	$792,986	$1,157,663	$1,710,475
	Income tax		$50,680	$60,816	($117,421)	($277,545)	($405,182)	($598,666)
	Net income		($94,120)	($112,944)	$218,067	$515,441	$752,481	$1,111,809
	Cash Flow Statement
	Net Income		($94,120)	($112,944)	$218,067	$515,441	$752,481	$1,111,809
	Add depreciation		$400,000	$640,000	$384,000	$230,400	$230,400	$115,200
	Investment	(2,000,000)
	Change in Working Capital		($155,520)	($31,104)	($37,325)	($44,790)	($53,748)	($64,497)
	Cash flow	($2,000,000)	$150,360	$495,952	$564,742	$701,051	$929,133	$1,162,512
		Present Worth =	IRR
		$242,443	18.39%

Q10

Question 10	Score	0
Suppose your CEO catches you at the coffee machine and says, "What is this "Time Value of Money" thing that you mentioned in the meeting yesterday? You have all those degrees so explain this to me clearly, not with quotes from a textbook or website." Write an explanation for the CEO using an example(s). Limit this to 500 words. Post this in the space below or in a separate MS Word document.
see the attached word file.