EFM-12problem - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17...

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Page 1 12problem 3/22/2010 7:08 Chapter 12. Solution to End-of-Chapter Comprehensive/Spreadsheet Problem Problem 12-11 You must analyze a potential new product--a caulking compound that Cory Mateials' R&D people developed for use in the residential construction industry. Cory's marketing manager thinks they can sell 115,000 tubes per year at a price of $3.25 each for 3 years, after which the product will be obsolete. The required equipment would cost $150,000, plus another $25,000 for shipping and installation. Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payable and accruals) would rise by $15,000. Variable costs would be 60 percent of sales revenues, fixed costs (exclusive of depreciation) would be $70,000 per year, and the fixed assets would be depreciated under MACRS with a 3-year (Refer to Appendix 12A for MACRS depreciation rates.) When production ceases after 3 years, the equipment should have a marekt value of $15,000. Cory's tax rate is 40 percent, and it uses a 10 percent WACC for average-risk projects. a. Find the required Year 0 investment, the annual after-tax operaing cash flows, and the terminal year cash flow, and then calculate the project's NPV, IRR, MIRR, and payback. Assume at this point that the project is of average risk. Key Output: NPV = $4,014 IRR = 11.11% Part 1. Key Input Data MIRR = 10.75% Equipment cost plus installation $175,000 Market value of equipment in 2008 Increase in current assets $35,000 Tax rate Increase in current liabilities $15,000 WACC Unit sales 115,000 Sales price per unit $3.25 Variable cost per unit 60% Variable cost per unit (in dollars) $1.95 Fixed costs $70,000 Part 2. Depreciation and Amortization Schedule Years Accum'd Year Initial Cost 1 2 3 Deprn 175,000 Equipment Deprn Rate 33.0% 45.0% 15.0% Equipment Deprn, Dollars $57,750 $78,750 $26,250 $162,750 Ending Bk Val: Cost - Accum'd Deprn $12,250 Part 3. Net Salvage Values, in 2005 Equipment Estimated Market Value in 2008 $15,000 Book Value in 2008 12,250 Expected Gain or Loss 2,750 Taxes paid or tax credit 1,100 Net cash flow from salvage $13,900 A B C D E F G H 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44
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Page 2 Part 4. Projected Net Cash Flows (Time line of annual cash flows) Years, 1-4 basis 0 1 2 3 Years, actual year basis 2005 2006 2007 2008 Investment Outlays at Time Zero: Equipment (175,000) Increase in Net Operating WC (20,000) Operating Cash Flows over the Project's Life: Units sold 115,000 115,000 115,000 Sales price $3.25 $3.25 $3.25 Sales revenue $373,750 $373,750 $373,750 Variable costs 224,250 224,250 224,250 Fixed operating costs 70,000 70,000 70,000 Depreciation (equipment) 57,750 78,750 26,250 Oper. income before taxes (EBIT) 21,750 750 53,250 Taxes on operating income (40%)
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This note was uploaded on 03/21/2010 for the course BUSINESS AB102 taught by Professor Woo during the Spring '10 term at Nanzan.

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EFM-12problem - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17...

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