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%