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%