Hickman FNCE370 Assignment 3 PDF

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FNCE370 Assignment 3 Candice Hickman ID: 3400474

Question 1: a. $ 1,000,000 / 350,000 = 2.86 years b. 4 years and 2 days c. They will purchase the printer based on the payback period as it is 3 years but not if we use the discounted payback period because it I smore than 3 years. d. NPV of cash flows: = $ 1,339,142.43 PV of $100,000 salvage value = $43,232.76 NPV investment: Cash inflows $ 1,399,142.43 ADD Salvage $ 43,232.76 LESS invetm $ 1,000,000.00 NPV= 442,375.19

using Cashflows on calculator: CF0: -1,000,000 CO1: 350,000, CF1: 6 CO2: 100,000, CF2: 1 NPV: $441,648.49 Yes they should invest in the printer e. Profitability Index = Future cashflows / initial cost = (1,399,142.43,+ 43,232.76) / 350,000 = 4.1211

f. Internal Rate of Return = 27.27% g. YES h. I recommend that they buy the printer

Question 2: $6,559

Question 3: a. Investment A IRR: 24.00% Investment B IRR: 21.02%

b. Investment A c. Discount Rate

Investment A 60.00 43.13 29.06 17.18 7.06 -1.63

0% 5% 10% 15% 20% 25%

Investment B 70.00 47.88 29.79 14.82 2.31 -8.22

d.

NPV for investment A & B 80 70 60 50 40 30 20 10 0 0% -10

5%

10%

15%

20%

25%

30%

-20 Investment A

Investment B

e. No at 16% investment A would be $15.03 and investment B would be $12.14, thus at 16% the NPV will be lower for investment B when compared to investment A.

f. yes it would as theyd be equal h. 11%

Question 4: Annual CCA year 1 2 3 4 5

Beginning UCC 540,000 432,000 345,600 276,480 221,184

Investment NWC Sub Total Op. Income Taxes 37% Sub Total Salvage

CCA 108,000 86,400 69,120 55,296 44237

Year 0 -540,000 0 -540,000

Year 1

Year 2

Ending UCC 432,000 345,600 276,480 221,184 176,947 Year 3

Year 4

Year 5

x 0.37x 56,377.88

95,000

NPV Calculation: Investment

-540,000.00

w.capital invest. -20,000.00 Operating Cashflows PV of salvage

X 56,377.88

CCATS

36,423.71

NPV

$

0

Therefore Operating Cash flows must be NPV of cash flows $139,198.41 (PV), i/y 11%, FV:20,000 Need to make $15,336.89 after tax each month. 15,336.89 / .73 = $21,009.44 before tax savings for the project to be profitable

Question 5: a. Project A NPV: $243.43 B NPV: $290.79 b. c. Based on NPV, project B should be chosen d. 10% - 3% = 7% e. f. Project A: $ 312.16 Project B: $600.20

g. Project B because because both are higher, the real cash flows and the NPV.

Question 6: a. Year 1

Beg UCC 20000

CCA 20% 4000

End UCC 16000

CCATS 1600

2

16000

3200

12800

1280

3 4 5

12800 10240 8192

2560 2048 1638

10240 8192 6554

1024 819.2 655.2

b. PV CCATS1: $1,428.57 PV CCATS2: $1,020.41 PV CCATS3: $ 728.86 PV CCATS4: $ 502.62 PV CCATS5: $ 371.78 c. TOTAL PVCCATS

= $4,052.24

d. [19,000(0.2)(0.4)/0.2+0.12 x 1+0.5(.12)/ 1+(0.12)] – [ -1000(0.2)(0.4)/0.2+0.12 x 1+.5(.12)/1+.12)] =803.57

Question 7: a. Cash Break-even quantity is the number of units to be sold where cash flow is equal to zero; Q= (FC) / (P-v) The net present value at the Cash break-even point will be negative and equal to initial outlay, the payback period is the time it takes to repay the initial investment taking into account the net income generated and thus how many years to recover the investment, but at Cash break-even quantity zero investment is recovered as cash flows are equal to zero and the IRR is -100% at the cash break even quantity. b. Accounting break-even quantity is the number of units is the sales number of units that result in a zero project net income: Q= (FC+D) / (P-v) The break even level is equal to the sum of fixed costs and depreciation, divided by price per unit less variable cost per unit, the payback period is exactly equal to its life and has a negative NPV and an IRR of zero. c. Financial Break-even quantity is the sales quantity that result in a zero NPV. Firstly we have to determine what operating cash flow has to be for NPV to be zero then step two is to use this amount to determine sales volume. Q= (FC+OCF) / (P-v) The discounted payback period is equal to its life and the IRR is just equal to the required return.

Question 8: a. Sales: 160 x $19,000 = $3,040,000 Variable cost: 160 x $14,000 = $2,240,000 Fixed costs: $150,000 x 1.10 = $165,000 upper bound $150,000 X 0.9 = $135,000 lower bound

b. Base-case NPV =[ [(3,040,000 – 3,040,000*0.35) X (1-((1+0.15) X 4)))] / 0.5] - $680,000 = $2,412,869.57

g. Q = (FC + OCF) / (P-v) first calculate OCF: 680,000 = ocf x 3.03734 OCF = 223,880.11 Q = (150,000 + 223,880.11) / (19,000-14,000) = 74.776 round to 75 units is the financial break-even point

DOL = 1 +FC/OCF = 1+ 150,000 / 223,880.11 = 1.67 The DOL is the percentage change in operating cashflow relative to percentage change in quantity sold, therefore for the operating cash flow will need to increase by 1.67 times for every 1 % change in quantity sold.

Question 9: a. Predicted cashflows and net income Net Income Sales (35,000 x 230) $8,050,000 Variable costs (35,000x 200) 7,000,000 Gross profit 1,050,000 Fixed costs 300,000 Depreciation(20% x 1,500,000) 300,000 Earnings Before tax $ 450,000 Tax (38%) 171,000 Net Income $ 279,000

Cash Flows p/ year $ 8,050,000 7,000,000 1,050,000 300,000 0 171,000 $ 579,000

NPV of cash inflows = $2,036,476.90 NPV of salvage cost = $ 271,379.97 Less investment - 1,500,000.00 Less investment - 450,000.00 NPV TOTAL = $ 357,856.87 Yes, this project should be perused as the NPV > 0

b. Worst case scenario: Net Income Sales (35,000 x 207) $7,245,000 Variable costs (35,000x 200) 7,000,000 Gross profit 245,000 Fixed costs 300,000 Depreciation(20% x 1,500,000) 300,000 Earnings Before tax $ -355,000 Tax (38%) 0 Net Income $ -355,000 NPV of cash inflows = $- 193,447.72 NPV of salvage cost = $ 230,672.97 Less investment - 1,500,000.00 Less investment - 427,500.00 NPV TOTAL = $- 1,890,274.75 Reject project NPV < 0

Cash Flows p/ year $ 7,245,000 7,000,000 245,000 300,000 0 0 $ -55,000

Best Case scenario: c. Predicted cashflows and net income Net Income Sales (35,000 x 253) $8,855,000 Variable costs (35,000x 200) 7,000,000 Gross profit 1,855,000 Fixed costs 300,000 Depreciation(20% x 1,500,000) 300,000 Earnings Before tax $1,255,000 Tax (38%) 476,900 Net Income $ 778,100

NPV of cash inflows = $3,791,927.02 NPV of salvage cost = $ 312,086.96 Less investment - 1,500,000.00 Less investment - 427,500 NPV TOTAL = $ 2,176,513.98 Accept the project NPV>0

Cash Flows p/ year $ 8,855,000 7,000,000 1,855,000 300,000 0 476,900 $ 1,078,100...