Studyplan part1 (9,10) PDF

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P 9-1 (similar to)

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Daily Enterprises is purchasing a $ 9.7$9.7 million machine. It will cost $ 55 comma 000$55,000 to transport and install the machine. The machine has a depreciable life of five years and will have no salvage value. If Daily uses straight-line depreciation, what are the depreciation expenses associated with this machine? The yearly depreciation expenses are

P 9-2 (similar to)

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Daily Enterprises is purchasing a $ 10.3$10.3 million machine. It will cost $ 49 comma 000$49,000 to transport and install the machine. The machine has a depreciable life of five years and will have no salvage value. The machine will generate incremental revenues of $ 3.9$3.9 million per year along with incremental costs of $ 1.1$1.1 million per year. If Daily's marginal tax rate is 35 %35%, what are the incremental earnings (net income) associated with the new machine? The annual incremental earnings are

P 9-3 (similar to)

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You are upgrading to better production equipment for your firm's only product. The new equipment will allow you to make more of your product in the same amount of time. Thus, you forecast that total sales will increase next year by 15 %15% over the current amount of 103 comma 000103,000 units. If your sales price is $ 18$18 per unit, what are the incremental revenues next year from the upgrade? The incremental revenues are

P 9-4 (similar to)

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Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $ 23$23 million per year. While many of these sales will be to new customers, Pisa Pizza estimates that 30 %30% will come from customers who switch to the new, healthier pizza instead of buying the original version. a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza? b. Suppose that 56 %56% of the customers who will switch from Pisa Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case? a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza? The incremental sales associated with introducing the new pizza will be

P 9-5 (similar to)

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Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $ 4.2$4.2 million on TV, radio, and print advertising this year for the campaign. The ads are expected to boost sales of the Mini Mochi Munch by $ 8.4$8.4 million this year and $ 6.4$6.4 million next year. In addition, the company expects that new consumers who try the Mini Mochi Munch will be more likely to try Kokomochi's other products. As a result, sales of other products are expected to rise by $ 1.8$1.8 million each year. Kokomochi's gross profit margin for the Mini Mochi Munch is 37 %37%, and its gross profit margin averages 20 %20% for all other products. The company's marginal corporate tax rate is 35 %35% both this year and next year. What are the incremental earnings associated with the advertising campaign? (Round to the nearest dollar.) Complete the table below:

Incremental Earnings Forecast Sales of Mini Mochi Munch Other Sales Cost of Goods Sold Gross Profit Selling, General, and Admin. Expenses Depreciation EBIT Income tax at 35% Unlevered Net Income

Year 1 $ $ $ $ $ 0 $ $ $

P 9-5 Updated (similar to)

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Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $ 6.5$6.5 million on TV, radio, and print advertising this year for the campaign. The ads are expected to boost sales of the Mini Mochi Munch by $ 9.7$9.7 million this year and $ 7.7$7.7 million next year. In addition, the company expects that new consumers who try the Mini Mochi Munch will be more likely to try Kokomochi's other products. As a result, sales of other products are expected to rise by $ 1.9$1.9 million each year. Kokomochi's gross profit margin for the Mini Mochi Munch is 37 %37%, and its gross profit margin averages 24 %24% for all other products. The company's marginal corporate tax rate is 25 %25% both this year and next year. What are the incremental earnings associated with the advertising campaign? Complete the table below: (Round to the nearest dollar.)

Incremental Earnings Forecast Sales of Mini Mochi Munch Other Sales Cost of Goods Sold

Year 1 $ $ $

Gross Profit Selling, General, and Admin. Expenses Depreciation EBIT Income tax at 25%

$ $

Unlevered Net Income

$

0 $ $

P 9-6 (similar to)

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Hyperion Inc., currently sells its latest high-speed colour printer, the Hyper 500, for $ 368$368. Its cost of goods sold for the Hyper 500 is $ 210$210 per unit, and this year's sales (at the current price of $ 368$368) are expected to be 17 comma 00017,000 units. Hyperion plans to lower the price of the Hyper 500 to $ 315$315 one year from now. a. Suppose Hyperion considers dropping the price to $ 315$315 immediately, (rather than waiting one year). By doing so it expects to increase this year's sales by 28 %28% to 21 comma 76021,760 units. What would be the incremental impact on this year's EBIT of such a price drop? b. Suppose that for each printer sold, Hyperion expects additional sales of $ 82$82 per year on ink cartridges for the three-year life of the printer, and Hyperion has a gross profit margin of 78 %78% on ink cartridges. What is the incremental impact on EBIT for the next three years of dropping the price immediately (rather than waiting one year)? a. Suppose Hyperion considers dropping the price to $ 315$315 immediately, (rather than waiting one year). By doing so it expects to increase this year's sales by 28 %28% to 21 comma 76021,760 units. What would be the incremental impact on this year's EBIT of such a price drop? The change in EBIT will be

P 9-7 (similar to)

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You have a depreciation expense of $ 474 comma 000$474,000 and a tax rate of 38 %38%. What is your depreciation tax shield? The depreciation tax shield will be

P 9-7

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Updated (similar to)

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You have a depreciation expense of $ 512 comma 000$512,000 and a tax rate of 21 %21%. What is your depreciation tax shield? The depreciation tax shield will be

P 9-8 (similar to)

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You have forecast pro forma earnings of $ 1 comma 194 comma 000$1,194,000. This includes the effect of $ 150 comma 000$150,000 in depreciation. You also forecast a decrease in working capital of $ 96 comma 000$96,000 that year. What is your forecast of free cash flows for that year? The free cash flows from earnings will be

P 9-9 (similar to)

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Your pro forma income statement shows sales of $ 964 comma 000$964,000, cost of goods sold as $ 498 comma 000$498,000, depreciation expense of $ 96 comma 000$96,000, and taxes of $ 148 comma 000$148,000 due to a tax rate of 40 %40%. What are your pro forma earnings? What is your pro forma free cash flow? Complete the pro forma income statement below: (Round to the nearest dollar.)

Sales Cost of Goods Sold

$ $

Gross Profit Depreciation EBIT Taxes (40%) Earnings

$ $ $ $ $

P 9-9 Updated (similar to)

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Your pro forma income statement shows sales of $ 1 comma 026 comma 000$1,026,000, cost of goods sold as $ 487 comma 000$487,000, depreciation expense of $ 96 comma 000$96,000, and taxes of $ 110 comma 750$110,750 due to a tax rate of 25 %25%. What are your pro forma earnings? What is your pro forma free cash flow? Complete the pro forma income statement below: (Round to the nearest dollar.)

Sales Cost of Goods Sold

$ $

Gross Profit Depreciation EBIT Taxes (25%) Earnings

$ $ $ $ $

P 9-10

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(similar to) You are evaluating a new product. In year 3 of your analysis, you are projecting pro forma sales of $4.34.3 million and cost of goods sold of $2.582.58 million. You will be depreciating a $22 million machine for 55 years using straight-line depreciation. Your tax rate is 3838%. Finally, you expect working capital to increase from $210 comma 000210,000 in year 2 to $300 comma 000300,000 in year 3. What are your pro forma earnings for year 3? What are your pro forma free cash flows for year 3? Complete the following pro forma statement. (Round to the nearest dollar.)

Pro Forma Sales

P 9-11 (similar to)

Year 3 $

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Daily Enterprises is purchasing a $ 9.9$9.9 million machine. It will cost $ 53 comma 000$53,000 to transport and install the machine. The machine has a depreciable life of five years using straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $ 4.1$4.1 million per year along with incremental costs of $ 1.1$1.1 million per year. Daily's marginal tax rate is 35 %35%. You are forecasting incremental free cash flows for Daily Enterprises. What are the incremental free cash flows associated with the new machine? The free cash flow for year 0 will be

P 9-12 (similar

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to)

1 2 3 4

Castle View Games would like to invest in a division to develop software for a soon-to-bereleased video game console. To evaluate this decision, the firm first attempts to project the working capital needs for this operation. Its chief financial officer has developed the following estimates (in millions of dollars): (To copy the table below and use in Excel, click on icon in the upper right corner of table.) Year 1 Year 2 Year 3 Cash 66 1010 1515 Accounts receivable 2020 2222 2626 Inventory 55 99 1212 Accounts payable 1616 2020 2525 Assuming that Castle View currently does not have any working capital invested in this division, calculate the cash flows associated with changes in working capital for the first five years of this investment. (Note: Enter decreases as negative numbers.) The change in working capital for year 1 is

P 9-13 (similar to)

Year 0 Sales COGS

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Suppose that Linksys is considering the development of a wireless home networking appliance, called HomeNet, that will provide both the hardware and the software necessary to run an entire home from any Internet connection. Linksys's receivables are 15.7 %15.7% of sales and its payables are 15.3 %15.3% of COGS. Forecast the required investment in net working capital for HomeNet assuming that sales and cost of goods sold (COGS) will be as follows: 1 2 3 4 $ 23 comma 674$23,674 $ 26 comma 260$26,260 $ 23 comma 664$23,664 $ 8 comma 285$8,285 $ 9 comma 570$9,570 $ 10 comma 616$10,616 $ 9 comma 566$9,566 $ 3 comma 349$3,349 The required investment in net working capital for year 0 is

P 9-14

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Year 141 222 131 262

(similar to) Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars): Year 1 Year 2 Revenues 126.4126.4 169.3169.3 COGS and Operating Expenses (other than depreciation) 40.140.1 56.756.7 Depreciation 23.623.6 43.943.9 Increase in Net Working Capital 2.32.3 8.18.1 Capital Expenditures 25.525.5 44.544.5 Marginal Corporate Tax Rate 3535% 3535% a. What are the incremental earnings for this project for years 1 and 2? (Note: Assume any incremental cost of goods sold is included as part of operating expenses.) b. What are the free cash flows for this project for years 1 and 2? a. What are the incremental earnings for this project for years 1 and 2? (Note: Assume any incremental cost of goods sold is included as part of operating expenses.) (Round to one decimal place.) Calculate the incremental earnings of this project below:

Incremental Earnings Forecast (millions) Sales Operating Expenses Depreciation

Year 1 $ $ $

EBIT Income tax at 35%

$ $

Unlevered Net Income

$

P 9-15 (similar to) Cellular Access, Inc., a cellular telephone service provider reported net income of $ 255.2$255.2 million for the most recent fiscal year. The firm had depreciation expenses of $ 109.1$109.1 million, capital expenditures of $ 209.4$209.4 million, and no interest expenses. Net working capital increased by $ 9.7$9.7 million. Calculate the free cash flow for Cellular Access for the most recent fiscal year. The free cash flow is

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P 9-16 (similar to)

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Linksys is considering the development of a wireless home networking appliance, called HomeNet, that will provide both the hardware and the software necessary to run an entire home from any Internet connection. HomeNet's lab will be housed in warehouse space that the company could have otherwise rented out for $ 220 comma 000$220,000 per year during years 1 through 4. The tax rate for Linksys is 40 %40%. How does this opportunity cost affect HomeNet's incremental earnings? HomeNet will experience ▼ a decrease an increase in incremental earnings of $ nothing per year for the 4 years

P 9-17 (similar to)

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One year ago, your company purchased a machine used in manufacturing for $ 110 comma 000$110,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $ 155 comma 000$155,000 today. It will be depreciated on a straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of $ 40 comma 000$40,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $ 20 comma 000$20,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current machine is $ 10 comma 000$10,000 per year. The market value today of the current machine is $ 60 comma 000$60,000. Your company's tax rate is 35 %35%, and the opportunity cost of capital for this type of equipment is 12 %12%. Should your company replace its year-old machine? The NPV of replacing the year-old machine is

P 9-18 (similar to)

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Beryl's Iced Tea currently rents a bottling machine for $ 52 comma 000$52,000 per year, including all maintenance expenses. It is considering purchasing a machine instead and is comparing two options: a. Purchase the machine it is currently renting for $ 155 comma 000$155,000. This machine will require $ 24 comma 000$24,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $ 260 comma 000$260,000. This machine will require $ 15 comma 000$15,000 per year in ongoing maintenance expenses and will lower bottling costs by $ 15 comma 000$15,000 per year. Also, $ 38 comma 000$38,000 will be spent up front to train the new operators of the machine. Suppose the appropriate discount rate is 7 %7% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the cost of the rental machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The marginal corporate tax rate is 38 %38%. Should Beryl's Iced Tea continue to rent, purchase its current machine, or purchase the advanced machine? To make this decision, calculate the NPV of the FCF associated with each alternative. The NPV of renting the current machine is

P 9-19 (similar to)

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You have just completed a $ 17 comma 000$17,000 feasibility study for a new coffee shop in some retail space you own. You bought the space two years ago for $ 101 comma 000$101,000, and if you sold it today, you would net $ 111 comma 000$111,000 after taxes. Outfitting the space for a coffee shop would require a capital expenditure of $ 30 comma 000$30,000 plus an initial investment of $ 4 comma 900$4,900 in inventory. What is the correct initial cash flow for your analysis of the coffee shop opportunity? Identify the relevant incremental cash flows below: (Select all the choices that apply.) A. Amount you would net after taxes should you sell the space today.

B. Initial investment in inventory. C. Feasibility study for the new coffee shop. D. Capital expenditure to outfit the space. E. Price you paid for the space two years ago

P 9-20 (similar to)

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After spending a year and $55 comma 00055,000, you finally have the design of your new product ready. In order to start production, you will need $33 comma 00033,000 in raw materials and you will also need to use some existing equipment that you've fully depreciated, but which has a market value of $97 comma 00097,000. Your colleague notes that the new product could represent 1010% of the company's overall sales and that 1010% of overhead is $60 comma 00060,000. Your tax rate is 4040%. As you start your analysis of the product, what should be your initial incremental free cash flow? The initial incremental free cash flow is

P 9-20 Updated (similar to)

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After spending a year and $51 comma 00051,000, you finally have the design of your new product ready. In order to start production, you will need $31 comma 00031,000 in raw materials and you will also need to use some existing equipment that you've fully depreciated, but which has a market value of $97 comma 00097,000. Your colleague notes that the new product could represent 1010% of the company's overall sales and that 1010% of overhead is $60 comma 00060,000. Your tax rate is 2222%. As you start your analysis of the product, what should be your initial incremental free cash flow? The initial incremental free cash flow is

P 9-21 (similar to)

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You purchased a machine for $ 1.02$1.02 million three years ago and have been applying straight-line depreciation to zero for a seven-year life. Your tax rate is 35 %35%. If you sell the machine today (after three years of depreciation) for $ 779 comma 000$779,000, what is your incremental cash flow from selling the machine? Your total incremental cash flow will be

P 9-21 Updated (similar to)

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You purchased a machine for $ 1.05$1.05 million three years ago and have been applying straight-line depreciation to zero for a seven-year life. Your tax rate is 21 %21%. If you sell the machine today (after three years of depreciation) for $ 759 comma 000$759,000, what is your incremental cash flow from selling the machine? Your total incremental cash flow will be

P 9-22 (similar to)

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The Jones Company has just completed the third year of a five-year MACRS recovery period for a piece of equipment it originally purchased for $ 303 comma 000$303,000. a. What is the book value of the equipment? b. If Jones sells the equipment today for $ 177 comma 000$177,000 and its tax rate is 35 %35%, what is the after-tax cash flow from selling it...