Group 1 Final Paper - Rough Draft (2).docx

Working computers inc 6 the division reported 118m

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WORKING COMPUTERS, INC 6 The division reported $11.8M for 2004 and $3.8M for 2009. We see that the lack of capital and no growth in sales were contributing factors in the decline of net income (see Appendix B, Table 2, Projected expenses without the investment). Conducting the cash flow analysis with the investment, we see that the net income was reported at $14.8M in 2004 and increased in year 2005 and 2006. The division reported $26.1M, from 2007 to 2009. Depreciation was calculate using the five year and ten year Modified Accelerated Cost Recovery (MARCS) Allowances (Stretcher & Michael, Working Computers Inc., Case Study, p. 12). Taxed Expenses were reported at $1.4M for 2004 and significantly decreased in 2005 and 2006. However, we see that Taxed Expenses increased from 2007 to 2009. Additionally, considering the depreciation percentages in 2004 and 2005, the clash flow plus depreciation was $24M in 2004 and increased to $35.2M in 2005. We also see that there was a decrease in cash flow beginning in 2006. Cash flow plus depreciation was reported at $21.5M for 2009. Moreover, the Net Present Value (NPV) was calculated at $105M, and the Internal Rate of Return (IRR) was calculated at a positive 28% with the investment. The positive Internal Rate of Return indicates that the project is acceptable. Working’s management calculated the terminal value using the 14.5 percent hurdle rate and determined the terminal value at the end of 2009 to be $148.5M (see Appendix A, Table 1 Cash Flow with the investment). An analysis was also conducted without the $18M investment, and the Net Income for 2004 was reported at $11.9M; net income decreased from 2004 to 2006; and in 2007 from 2009 the Net Income was unchanged and reported at $3.8M. At a 7 percent MACRS Allowance, depreciation was the same from 2004 to 2007, and reported at $3.9M; and decreased slightly in year 2008, and further decreased in 2009 with a 6 percent, MACRS Allowance in year 11 (Stretcher et al., Working Computers Inc., Case Study, p. 12). Additionally, for planning
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WORKING COMPUTERS, INC 7 purposes, the firm applied a 34 percent marginal tax rate. With this tax rate, we see that taxes fluctuate due to Net Income minus Depreciation. The Net Present Value without the investment was calculated at $35.2M and the Internal Rate of Return was calculated at a negative 8 percent, signaling that the project cannot be successful without the investment and management should consider eliminating the division. Working’s management calculated the terminal value using the 14.5 percent hurdle rate and determined the terminal value at the end of 2009 without the investment to be $32.8M (see Appendix B, Table 2 Cash Flow without investment). Recommendation Jennifer will then need to recommend if Working Computers should invest the $18M the Bernoulli division, making sure that all aspects of the decision, including the possible impact the $18M investment could have on Stewart Workman’s plans. The Net Present Value depicts positive numbers in both cases, however much higher with investment rather than without.
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