Question.3000 - Your assignment for this week is to complete the following questions and problems from Chapters 11 and 12. Please submit your complete assignment in the course room by the due date. Chapter 11 Questions (11-2) Operating cash flows, rather than accounting profits, are used in project analysis. What is the basis for this emphasis on cash flows as opposed to net income? (11-4) Explain why sunk costs should not be included in a capital budgeting analysis but opportunity costs and externalities should be included. (11-5) Explain how net operating working capital is recovered at the end of a project’s life and why it is included in a capital budgeting analysis. (11-7) Why are interest charges not deducted when a project’s cash flows are calculated for use in a capital budgeting analysis? (11-8) Most firms generate cash inflows every day, not just once at the end of the year. In capital budgeting, should we recognize this fact by estimating daily project cash flows and then using them in the analysis? If we do not, will this bias our results? If it does, would the NPV be biased up or down? Explain. (11-11) In theory, market risk should be the only “relevant” risk. However, companies focus as much on stand-alone risk as on market risk. What are the reasons for the focus on stand- alone risk?Chapter 11 Problems (11-3) Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $12 million, of which 75% has been depreciated. The used equipment can be sold today for $4 million, and its tax rate is 40%. What is the equipment’s after-tax net salvage value? (11-4) Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The firm’s WACC is 10%, and its marginal tax rate is 35%. Should Chen buy the new machine?(11-6) The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer’s base price is $1,080,000, and it would cost another $22,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $605,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $15,500. The sprayer would not change revenues, but it is expected to save the firm $380,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 35%. a. What is the Year 0 net cash flow? b. What are the net operating cash flows in Years 1, 2, and 3? c. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)? d. Based on your IRR analysis, if the project’s cost of capital is 12%, should the machine be purchased?Chapter 12 Problems (12-1) Broussard Skateboard’s sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $5 million at the end of 2013. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted payout ratio is 40%. Use the AFN equation to forecast Broussard’s additional funds needed for the coming year. (12-8) Stevens Textiles’s 2013 financial statements are shown here:Balance Sheet as of December 31, 2013 (Thousands of Dollars) Cash $ 1,080 Accounts payable $ 4,320 Receivables 6,480 Accruals 2,880 Inventories 9,000 Line of credit 0 Total current assets $16,560 Notes payable 2,100 Net fixed assets 12,600 Total current liabilities $ 9,300 Mortgage bonds 3,500 Common stock 3,500 ______ Retained earnings 12,860 Total assets $29,160 Total liabilities and equity $ 29,160Income Statement for December 31, 2013 (Thousands of Dollars) Sales $36,000 Operating costs 32,440 Earnings before interest and taxes $ 3,560 Interest 460 Pre-tax earnings $ 3,100 Taxes (40%) 1,240 Net income $ 1,860 Dividends (45%) $ 837 Addition to retained earnings $ 1,023 a. Suppose 2014 sales are projected to increase by 15% over 2013 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2014. The interest rate on all debt is 10%, and cash earns no interest income. Assume that all additional debt in the form of a line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings. Assume that the company was operating at full capacity in 2013, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the additional funds needed. b. What is the resulting total forecasted amount of the line of credit?
Answer Below:
Your xxxxxxxxxx for xxxx week xx to xxxxxxxx the xxxxxxxxx questions xxx problems xxxx Chapters xxx Please xxxxxx your xxxxxxxx assignment xx the xxxxxx room xx the xxx date xxxxxxx Questions x Operating xxxx flows xxxxxx than xxxxxxxxxx profits xxx used xx project xxxxxxxx What xx the xxxxx for xxxx emphasis xx cash xxxxx as xxxxxxx to xxx income xxxxxxxx Only xxxx can xx spent xx reinvested xxx since xxxxxxxxxx profits xx not xxxxxxxxx cash xxxx are xx less xxxxxxxxxxx importance xxxx cash xxxxx for xxxxxxxxxx analysis x Explain xxx sunk xxxxx should xxx be xxxxxxxx in x capital xxxxxxxxx analysis xxx opportunity xxxxx and xxxxxxxxxxxxx should xx included xxxxxxxx Capital xxxxxxxxx analysis xxxxxx only xxxxxxx those xxxx flows xxxx will xx affected xx the xxxxxxxx Sunk xxxxx are xxxxxxxxxxxxx and xxxxxx be xxxxxxx so xxxx have xx bearing xx the xxxxxxx budgeting xxxxxxxx Opportunity xxxxx represent xxx cash xxxxx the xxxx gives xx by xxxxxxxxx in xxxx project xxxxxx than xxx next xxxx alternative xxx externalities xxx the xxxx flows xxxx positive xxx negative xx other xxxxxxxx that xxxxxx from xxx firm xxxxxx on xxxx project xxxxx cash xxxxx occur xxxx because xxx firm xxxx on xxx capital xxxxxxxxx project xxxxxxxxx they xxxx be xxxxxxxx in xxx analysis x Explain xxx net xxxxxxxxx working xxxxxxx is xxxxxxxxx at xxx end xx a xxxxxxx s xxxx and xxx it xx included xx a xxxxxxx budgeting xxxxxxxx Solution xxxx a xxxx takes xx a xxx capital xxxxxxxxx project xx typically xxxx increase xxx investment xx receivables xxx inventories xxxx and xxxxx the xxxxxxxx in xxxxxxxx and xxxxxxxx thus xxxxxxxxxx its xxx operating xxxxxxx capital xxxx Since xxxx increase xxxx be xxxxxxxx it xx included xx an xxxxxxx in xxxx of xxx analysis xx the xxx of xxx project x life xxxxxxxxxxx are xxxxxxxx and xxxxxxxxxxx are xxxxxxxxx Thus xxxxx is x decrease xx NOWC xxxxx is xxxxxxx as xx inflow xx the xxxxx year xx the xxxxxxx s xxxx - xxx are xxxxxxxx charges xxx deducted xxxx a xxxxxxx s xxxx flows xxx calculated xxx use xx a xxxxxxx budgeting xxxxxxxx Solution xxxxxxxx is xxxx of xxx project xxxx when xxx loan xx availed xxx the xxxxxxx Even xx the xxxx is xxx taken xxx interest xx the xxxxxxxxxxx cost xx arrive xx the xxxxxxx cash xxxx the xxxxxxxx is xx be xxxxx so xxxx exact xxxx out xxxx can xx calculated xxxxxxxx charges xxx usually xxx deducted xxxx project xxxx flows xxx calculated xx capital xxxxxxxxx because xx is xxxx to xxxxxxxx investment xxxxxxxx from xxxxxxxxx decisions xxxxxxxx charges xxxxxx not xx included xxxxxxx they xxxxxx to xxx financing xxxxxx than xxx investment xxxxxxxx Were xxxxxxxx payments xx be xxxxxxxx from xxx cash xxxxx it xxxxx amount xx double xxxxxxxx since xxx discounting xxxxxxx already xxxxxxxxx the xxxx of xxxxxxx in xxx form xx the xxxxxxxx rate xx include xxxxxxxx charges xx a xxxx outflow xxxxx therefore xxxxxxxxx understate xxx true xxx - xxxx firms xxxxxxxx cash xxxxxxx every xxx not xxxx once xx the xxx of xxx year xx capital xxxxxxxxx should xx recognize xxxx fact xx estimating xxxxx project xxxx flows xxx then xxxxx them xx the xxxxxxxx If xx do xxx will xxxx bias xxx results xx it xxxx would xxx NPV xx biased xx or xxxx Explain xxxxxxxx In xxxxxx in xxxxxxx budgeting xxxxxxxx we xxxxxx discount xxx cash xxxx on xxx exact xxxxxx when xxxx occur xxxxxxxxx we xxx argue xxxx daily xxxx flows xxxx be xxxxxx than xxxxxx cash xxxxx However xx will xx costly xx estimate xxxxx cash xxxxx and xxxxxxxxx to xxxxxxx them xx general xxx analysis xxxxx be xx better xxxx one xxxxx annual xxxx flows xxxxxxx we xxxxxx can x make xxxxxxxx forecasts xx daily xxxx flows xxxx than x couple xx months xxxx the xxxxxx Therefore xx is xxxxxxxxx appropriate xx assume xxxx all xxxx flows xxxxx at xxx end xx various xxxxx - xx theory xxxxxx risk xxxxxx be xxx only xxxxxxxx risk xxxxxxx companies xxxxx as xxxx on xxxxxxxxxxx risk xx on xxxxxx risk xxxx are xxx reasons xxx the xxxxx on xxxxxx alone xxxx Solution xxxxxx on x project xxxx high xxxxxx of xxxxxx stand-alone xx corporate xxxx will xxx necessarily xxxxxx the xxxx s xxxx However xx the xxxxxxx has xxxxxx uncertain xxxxxxx and xx those xxxxxxx are xxxxxx correlated xxxx returns xx firms xxxxx assets xxx with xxxx other xxxxx in xxx economy xxx project xxxx have x high xxxxxx of xxx types xx risks xxx example xxxxxxx Motors xxxxxxxxx decides xx undertake x major xxxxxxxxx to xxxxx commuter xxxxxxxx GM xx not xxxx how xxx technology xxxx work xx a xxxx production xxxxx so xxxxx are xxxxx risks xx the xxxxxxxxxxx stand-alone xxxx is xxxx Management xxxx estimates xxxx the xxxxxxx will xx best xx the xxxxxxx is xxxxxx for xxxx people xxxx have xxxx money xx spend xx the xxx planes xxxx means xxxx the xxxxxxx will xx well xx GM x other xxxxxxxx do xxxx and xxxx to xx badly xx other xxxxxxxx do xxxxx This xxxxx the xxxx the xxxxxxx will xxxx have x high xxxxxxxxx risk xxxxxxx GM x profits xxx highly xxxxxxxxxx with xxxxx of xxxx other xxxxx the xxxxxxxx beta xxxx also xx high xxx this xxxxxxx will xx riskier xxxxx all xxxxx types xx risks xx the xxxxx the xxxxxx risk xx theoretically xxx most xxxxxxxx because xx is xxx reflected xx stock xxxxxx Unfortunately xxxxxx risk xx also xxx most xxxxxxxxx to xxxxxxxx because xxxxxxxx don x have xxxxxx prices xxxx can xx related xx stock xxxxxx returns xxx this xxxxxx most xxxxxxxx makers xxxxxxxx all xxxxx risk xxxxxxxx in x judgemental xxxxxx and xxxx classify xxxxxxxx into xxxxxxxxxx risk xxxxxxxxxx There xxx different xxxxx of xxxxx associated xxxx market xxx these xxxxx of xxxxx are xxxxx as xxxxxxxxxx risk xxxxxx risk xxxxxxxxx risk xx market xxxx companies xxxx through xxx eyes xx the xxxxxxxxxxxx The xxxxxxx s xxxxxxxxxxxx look xxxx the xxxxxxxxxxxx point xx view xxx not xxxx the xxxxxxx s xxxxx of xxxx It xx measured xx the xxxxxxx s xxxx but xxxx stockholders xxxxxxxx In xxxxxxxxxx risk xxxxx is xxxx one xxxxxx project xxxxxxxx in xx In xxxx type xx risk xxxx single xxxxx is xxxxxxx Problems x Allen xxx Lines xxxx liquidate xxxx equipment xxxx is xxxxx replaced xxx equipment xxxxxxxxxx cost xxxxxxx of xxxxx has xxxx depreciated xxx used xxxxxxxxx can xx sold xxxxx for xxxxxxx and xxx tax xxxx is xxxx is xxx equipment x after-tax xxx salvage xxxxx Solution xxxxxxx Value xxxx Price xxxx Value x Sale xxxxx x x - x X x Although xxx Chen xxxxxxx s xxxxxxx machine xx old xx is xxxxx in xxxxxxxxxx good xxxxxxx order xxx would xxxx for xxxxxxx years xx is xxxxxxxxxxx compared xx modern xxxxxxxxx though xxx so xxx company xx considering xxxxxxxxx it xxx new xxxxxxx machine xx a xxxx of xxxxxxxxx and xxxxxxxxx would xxxx last xxx years xxx would xxxxxxx after-tax xxxx flows xxxxx savings xxx depreciation xxx savings xx per xxxx It xxxxx have xxxx salvage xxxxx at xxx end xx its xxxx The xxxx s xxxx is xxx its xxxxxxxx tax xxxx is xxxxxx Chen xxx the xxx machine xxxxxxxx Cost xx New xxxxxxxxx New xxxxxxx life xxxxx After-tax xxxx flow xxxx Salvage xxxxx WACC xxxxxxxx tax xxxx Annual xxxxxxxxxxxx - xxxxxxx Value xx the xxxxxx Cash xxxxx The xxxxxxx should xxx the xxxxxxxxx as xxx company xxxx be xxxxxxxxxx by x - xxx Campbell xxxxxxx is xxxxxxxxxxx adding x robotic xxxxx sprayer xx its xxxxxxxxxx line xxx sprayer x base xxxxx is xxx it xxxxx cost xxxxxxx to xxxxxxx it xxx machine xxxxx into xxx MACRS xxxxx class xxx it xxxxx be xxxx after xxxxx for xxx MACRS xxxxx for xxx first xxxxx years xxx and xxx machine xxxxx require xx increase xx net xxxxxxx capital xxxxxxxxx of xxx sprayer xxxxx not xxxxxx revenues xxx it xx expected xx save xxx firm xxx year xx before-tax xxxxxxxxx costs xxxxxx labor xxxxxxxx s xxxxxxxx tax xxxx is x What xx the xxxx net xxxx flow x What xxx the xxx operating xxxx flows xx Years xxx c xxxx is xxx additional xxxxx cash xxxx i x the xxxxxxxxx salvage xxx the xxxxxx of xxxxxxx capital x Based xx your xxx analysis xx the xxxxxxx s xxxx of xxxxxxx is xxxxxx the xxxxxxx be xxxxxxxxx The xxx cost xx Price xxxxxxxxxxxx Increase xx NWC xxxx outlay xxx new xxxxxxx b xxx operating xxxx flows xxxxxx Year xxxx Year xxxxxxxxx savings xxxxxxxxxxxx tax xxxxxxx Net xxxx flow xxxxx The xxxxxxxxx cost xxxxxxx is x T xxx depreciation xxxxxxx in xxxx year xx the xxxxxxxxxxx basis xxxxx the xxxxx allowance xxxxxxxxxxx of xxx for xxxxx and xxxxxxxxxxxx Depreciation xxxxxxx in xxxxx and xx and xxx depreciation xxx savings xx calculated xx the xxx rate xxxxx the xxxxxxxxxxxx expense xx each xxxx c xxx terminal xxxx cash xxxx is xxxxxxx value xxx on xx Return xx NWC xx in xxxx Tax xx SV x d xxx project xxx an xxx of xxxx it xxxxxx not xx accepted xxxx Net xxxx Flow xx NPV xxxxxxx Problems x Broussard xxxxxxxxxx s xxxxx are xxxxxxxx to xxxxxxxx by xxxx million xx to xxxxxxx in xxx assets xxxxxxx million xx the xxx of xxxxxxxxx is xxxxxxx at xxxx capacity xx its xxxxxx must xxxx at xxx same xxxx as xxxxxxxxx sales xx the xxx of xxxxxxx liabilities xxxx million xxxxxxxxxx of xx accounts xxxxxxx of xxxxx payable xxx of xxxxxxxx The xxxxxxxxx profit xxxxxx is xxxxxxxxxx to xx and xxx forecasted xxxxxx ratio xx Use xxx AFN xxxxxxxx to xxxxxxxx Broussard x additional xxxxx needed xxx the xxxxxx year xxxxxxxx AFN x S x - x S x - xx RR x X x X x - x - xxxxxxx Textiles x financial xxxxxxxxxx are xxxxx here xxxxxxx Sheet xx of xxxxxxxx Thousands xx Dollars xxxx Accounts xxxxxxx Receivables xxxxxxxx Inventories xxxx of xxxxxx Total xxxxxxx assets xxxxx payable xxx fixed xxxxxx Total xxxxxxx liabilities xxxxxxxx bonds xxxxxx stock xxxxxxxx earnings xxxxx assets xxxxx liabilities xxx equity xxxxxx Statement xxx December xxxxxxxxx of xxxxxxx Sales xxxxxxxxx costs xxxxxxxx before xxxxxxxx and xxxxx Interest xxxxxxx earnings xxxxx Net xxxxxx Dividends xxxxxxxx to xxxxxxxx earnings x Suppose xxxxx are xxxxxxxxx to xxxxxxxx by xxxx sales xxx the xxxxxxxxxx financial xxxxxxxxx method xx forecast x balance xxxxx and xxxxxx statement xxx December xxx interest xxxx on xxx debt xx and xxxx earns xx interest xxxxxx Assume xxxx all xxxxxxxxxx debt xx the xxxx of x line xx credit xx added xx the xxx of xxx year xxxxx means xxxx you xxxxxx base xxx forecasted xxxxxxxx expense xx the xxxxxxx of xxxx at xxx beginning xx the xxxx Use xxx forecasted xxxxxx statement xx determine xxx addition xx retained xxxxxxxx Assume xxxx the xxxxxxx was xxxxxxxxx at xxxx capacity xx that xx cannot xxxx off xxx of xxx fixed xxxxxx and xxxx any xxxxxxxx financing xxxx be xxxxxxxx as xxxxx payable xxxx assume xxxx assets xxxxxxxxxxx liabilities xxx operating xxxxx are xxxxxxxx to xxxxxxxx by xxx same xxxxxxxxxx as xxxxx Determine xxx additional xxxxx needed x What xx the xxxxxxxxx total xxxxxxxxxx amount xx the xxxx of xxxxxx Solution xxxxxxx Textiles xxx Forma xxxxxxx Sheet xxxxxxxx Thousands xx Dollars xxxxxxxxxxx Forecast xxxxxxxx forma xxxxx Sales xxxxxxxxx costs xxxxx EBIT xxxxxxxx EBT xxxxx Net xxxxxx Dividends xxxxxxxx to xx Stevens xxxxxxxx Pro xxxxx Balance xxxxx December xxxxxxxxx of xxxxxxx Particulars xxxxxxxx basis xxxxxxxxxxxxx sPro xxxxx Pro xxxxx after xxxxxxxx gFinancing xxxx Accounts xxxxxxxxxx Inventories xxxxx current xxxxxx Fixed xxxxxx Total xxxxxx Accounts xxxxxxx Accruals xxxxx payable xxxxx current xxxxxxxxxxx Long-term xxxx Total xxxx Common xxxxx Retained xxxxxxxx Total xxxxxxxxxxx and xxxxxx AFN xxxx income xxxxxxxxx b xxxxxxxx in xxxxxxxx expense xx Pass xxxxxxxxx nd xxxx Feedback xxxxx Operating xxxxx EBIT xxxxxxxx EBT xxxxx Net xxxxxx Dividends xxxxxxxx to xxxxxxxx earnings xxxxxx in xx because xx feedback x - xx Pass xxxxxxxxx nd xxxx Feedback xxxxx assets xxxxxxxx payable xxxxxxxx Notes xxxxxxx Total xxxxxxx liabilities xxxxxxxxx debt xxxxx debt xxxxxx stock xxxxxxxx earnings x Total xxxxxxxxxxx and xxxxxx AFN xxx income xxxxxxxxx Thus xxx original xxx amount xxx been xxxxxxx after xx additional xxxxxxxxx from xx The xxxxxxxxxx AFN xxx both xxxxxx isMore Articles From Accounting
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