Expert Solutions

Question 1
The Income and Balance Statements for a corporation are shown below for two consecutive years.  What conclusions for a potential investor can be drawn from these?  Justify your conclusions.  Record your answer below the financial statements.

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Question 2
Operating System Extraordinaire (OSE)  is looking at offering a  new productivity software package that will be used exclusively online in their “cloud.”  They presently sell a very profitable desktop system and the new offering is expected to cannibalize sales from the present offering.  All needed development to offer the new product is complete and expensed in previous years, so investment is a sunk cost to be ignored.  Future development will be an annual expense (not depreciated).  They need an estimate of net income over the next three year to give to investors, who would prefer to stay with the current “cash cow.”  (This not an evaluation of a proposal but simply a request to prepare information for investors)
The following data is an estimate of the finances concerning the change.  The data for the desktop system is in column C and the data for the new Cloud system is in column D.  COGS will be reduced since with the cloud approach there is no product to distribute.   Similarly the Support staff and facilities can be reduced sine much of the support involved installation issues.  A major marketing campaign is planned to get customers to change to the new software (this is especially a concern for the present investors).
All data in millions of dollars           Desktop System            Cloud System
Year 0 Sales                                              $5,000                           $50
% change annually                                      -10%                           25%
COGS %                                                          20%                           2%
Support Staff/facilities – annual            $100                            $50     All years
Development                                            $500                       $1,000     All years
Marketing                                                 $250                           $750    All years
Tax Rate                                                       15%                           15%      All years
No debt or interest
a Prepare a proposal income statement for the upcoming three years that includes totals for COGS, SG&A, and EBIT.
b Is the marketing expenditure an issue?

Question 3
Ginger’s band incurs a fixed monthly cost for a bus, truck, practice studio and support staff.  Each show results in revenues and costs as listed below.  These costs do no include compensation for the band members.
a How many performances per month does Ginger need to break even (no compensation for band members)?
b If each of the band members are paid $40,000 each for each show, what is the break even number of shows per month for the band?
c The band also earns profits of $1,000,000 from CD sales annually.  There are four members in the band.  How many performances are needed annually for each to earn $1 million from performances and CD sales?
Present monthly fixed cost     $240,000
Revenue per show                   $500,000
Costs per show                         $300,000

Question 4
Precision Parts, Inc. (PPI), is evaluating a proposal for a new automated machining center that is expected to last 20 years.  The initially cost will be depreciated using MACRS over 5 years.  Every three years it will require a major overhaul extending its life for 3 years.  The first overhaul will be in year 4 and this upgrade will be depreciated using  3-year MARCS depreciation.  The MACRS rates and financial data are shown below.
Although the automated machine is not expected to be sold, determine the capital gain/loss and capital gains tax at the end of year 5 given the  estimated salvage value stated below at that time.
MACRS Rates(%)
1                  2                  3                   4                 5                       6
3-Year        33.33%        44.45%        14.81%        7.41%
5-year       20.00%        32.00%         19.20%       11.52%       11.52%             5.76%
Initial Investment             $1,000,000
Overhaul                               $500,000
Salvage Value in year 5      $600,000
Capital Gains tax rate               20%

Question 5
LiveForever Biotechnology Corporation (LFBC) has a new potential drug developed by their research group  that they are considering moving from the lab into production.  The available information is listed below with production and sales to start in year 1.
All new working capital will be put in place during year 1 and will continue past the proposal time frame (not set to zero in year 5).
The salvage value in year 5 is zero.
Determine the internal rate of return and present worth.
Year                                                                    1             2               3                 4                 5
Sales Revenue                        Forecast      $50.00     $75.00    $150.00     $200.00      $300.00
Past research costs              $100        million
Facilities Investment               $8          million
Depreciation on new facility   5          years straight line
Cost of Goods Sold (COGS)      30%    of revenues
Start up costs                            $20       million  Expensed in first year (only)

Marketing                                 $20            million annually
Management                           $30             million annually
Inventory                                  20%            of revenues
Accounts Receivable              40%           of revenues
Accounts Payable                   65%            of COGS
MARR                                         0%

Tax Rate                                   25%

Question 6
The manufacturing manager for Modern Manufacturing Company is working on a justification for implementing a “Lean/Just-in-time” manufacturing system.  No upfront investment will be needed. No  revenue changes are forecasted.  A team of employees will spend their time training employees and making process changes.  The salaries and benefits of the “Just-in-time” staff are shown below for the three years of the project.
A team of employees will spend their time training employees and making process changes.  The salaries and benefits of the “Just-in-time” staff are shown below for the three years of the project.  There will not be any change in other S.G.&A. expenses.
Financial gains are expected to be a reduction in the following areas:  cost of good sold, inventory, and accounts payable.  The data is shown below where each year changes from the previous year by the percentages shown.
Determine the present worth of the project to see if the savings justify the costs.
Data Block

Time Span                                             3                  Years
Year                                                        0                   1                    2                     3
JIT Team costs                                                      $300,000            $200,000              $100,000
COGS-Reduction per year               7.5%               annually
COGS at end of year 0                $3,000,000

Inventory Reduction per year              10%          annually
Inventory at end of year 0            $200,000
Accounts Receivable reduction              0%        annually
Accounts Receivable at end of year 0   $150,000
Accounts Payable & reduction               10%           annually
Accounts payable at end of year 0       $100,000
Tax Rate                                                          25%             annually
Interest Expense annually                      $250,000
constant every year

MARR                                                            15%
Question 7
Roger Lovrenich of Lovrenich Motor Electronics has spent his career building his company, and invested all profits back into the company.  He now realizes that he needs to plan for his retirement in 5 years and has little retirement funds beyond social security, and his company.  His plan is to milk as much net earnings out of the company for five years and then sell it.  To do this he will progressively reduce S.G,&A.  expenses.  He expects no change in the % for cost of goods sold, nor in working capital.   The company will be sold in year 5 and this should be considered the salvage value.  Capital Gains tax in his state is 15%.
A simplified Income statement for the five years is shown below.  All assets are fully depreciated
Prepare a cash flow statement and determine the minimum price for selling the company at the end of year 5 to attain a present value of $5 million using  a MARR of 10%?
Income Statement 

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Question 8
Maryland Technical  Acumen (MTA) is considering a new product line which will require an investment in production equipment and facilities in the current year.
MTA’s quantitative staff has collected data and derived equations that predict the volume that will be sold at various price levels.  Higher prices achieve lower sales quantities.  They also derived equations that estimate the COGS for various levels of quantity.  Higher quantities tend to achieve lower costs, up to a point.   These estimates have been accepted by management as being reasonably accurate.
The plan is to sell the machine at the end of year 5 when newer models will be available.
Below is an Income and cash flow statements that management has approved.  (If there are errors or oversights, that is their problem).  Management has requested information to help them set a price than achieves the maximum present worth.
a Perform a sensitivity analysis for unit prices (price each) starting at $20 and going to $50 in intervals of $10.  ($20, $30, $40 & $50).
b In whole dollars, what price generates the largest present worth?
c Discuss the implications of the sensitivity analysis.  In whole dollars, what price generates the largest present worth? 

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Question 9
The town of Oxford has received a donation of 100 acres of land.  It is 70% wooded and 30% of open fields.  Below are listed the alternative uses which could be located on the property.    Shown for each possible use is a cost to build, estimated users per year, cost to  the town of each user (maintenance), and an estimated benefit value for each user.  Costs are the Cost to Build only.  Consider Benefits as the net benefit of each user (benefit minus cost).  Use a 10 year time frame for the benefits, and they will be constant in each year.  Oxford uses a 7% rate for evaluations.
a If only one alternative can be chosen in the first year, which one should it be using the B/C criteria.
b Assign a priority for the various projects from 1 to 8 with 1 the highest priority using the B-C criteria. 

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Question 10
Your production facility is one plant of ten within a major corporation.  You are preparing a financial analysis for  the adoption of a complex proposal to submit to a corporate investment committee.  The corporate committee wants a 5-year present worth analysis of cash flow, of which your plant manager knows nothing.   Before his company was bought by the corporation, they just summed the estimated labor savings and divided by the investment.  There will be other competing proposals at the corporate level so it is important to do it in this new way, with the plant manager’s backing.  Write an explanation to the busy plant manager as to why the present worth approach should be used.  This can be put below or in a word document.