Financial Math Problems, See Attached Document for More Details

Financial Math problems, see attached document for more details

Q1 CEO of Orange, Inc. is evaluating a proposal for outsourcing all their internal part productionScorefocusing internal 0
The
and
operations only forecasted to reduce the The cost to parts by outsourcing ,forecast at $350,000, be constant at the reduced
The proposal is on assembly of the parts.unit cost of theconvert to15% in year 1 and then the cost will is not depreciable and will
be expensed (paid theirin year product willA. reduced expected to increase then held expense by this in year 1 and hold constant
level sales price of The additional purchasing effort is by 5% in year 1 and S.G.& A. constant at 8% level in the future. The price
This in the future. for) single 1 in S.G.& be
at the the is forecastedthe increase sales quantities as shown below. Without the proposal the sales price, costs to produce,
decrease new level in to future.
Construct and Income statement part to stay the same as present.
S.G.& A., the sales are all expected of a financial analysis that could be used to evalaute the proposal. The time horizon for this
proposal is 5 years. Show all subtotals in the income statement.
Year
1
2
3
4
5
Sales Quantity- with proposal
126,000
132,300
138,915
145,861
153,154
Sales Quantity - without proposal
120,000
120,000
120,000
120,000
120,000
one-time
Present
change
Proposed
Per Unit
$18.99
5%
less
Machined parts cost per unit
$4.40
15%
less
Assembly cost per unit
$5.60
0%
no change
S.G. & A
$150,000
8%
increase
Cost of proposal
$350,000
Proposal life span
5
years
Income tax
14%
annually
MARR
10%
annually
Solution
Q2
Score
0
Modern Medical Mechanics (M3) has to replace a production machine used to produce a single part. They need an evalaution of two
Both of the machine models. The forecasted demand for the part iswiththebelow.The choice the end of 4will not that is listed below.
alternative new machines will last four years and then be replaced shown salvage values at of machine years affect this demand.
Depreciation will be 5-year MACRS The two machines have the prices, production cost per part, and salvage value in year 4 as shown
Using a All setup of the new machines is part of the purchase price. of which machine should be adopted from a financial perspective.
below. 4-year time horizon, document and make a recommendation
Assume that there will not be any change in S.G. & A or working capital resulting from this decision.
Machine
Machine Titanium
Platinum
Purchase price
$188,000
$223,000
Salvage value
$50,000
$60,000
Production cost per part
$14.88
$12.45
Years
0
1
2
3
4
Annual part usage
0
55,000
60,000
62,500
95,000
Time horizon
4
years
Income tax rate
15.00%
Capital gains tax rate
15.00%
MARR
12.50%
Depreciation
5
MACRS years
0
1
2
3
4
5
MACRS
20.00%
32.00%
19.20%
11.52%
11.52%
$0
Solution
6
5.76%
Q3
Score
0
Josephine has been through several start up situations and has the time, wealth and connections to do another one. She is now planning the next startup
that looks very promising with sales expected to double every year. Following is the information that has been collected and the expected income statement.
The investments, depreciation and book value results are provided below and are to be used as they are presented.
Help Josephine with her 5-year plan by preparing a cash flow statement and determine the present worth and future worth of this proposal.
Revenue in year 0
Company worth at end of year 5
Income Tax rate
Capital Gains Tax rate
MARR
Year
Annual Investment
Annual Depreciation
Book Value
Working Capital
Accounts Receivable
Inventory
Accounts Payable
Wages Payable
Income Statement
Revenue
COGS
Gross Margin
SG&A
Depreciation
EBIT
Tax
Net Income
Solution
$1,500,000
$125,000,000
20%
12%
20%
0
$5,000,000
1
$10,000,000
$1,000,000
2
$20,000,000
$5,200,000
3
$30,000,000
$11,040,000
4
$30,000,000
$17,776,000
5
$0
$24,048,000
$5,000,000
$14,000,000
$28,800,000
$47,760,000
$59,984,000
$35,936,000
0
$0
$10,000
$20,000
$5,000
1
$250,000
$100,000
$180,000
$50,000
2
$400,000
$150,000
$180,000
$65,000
3
$550,000
$200,000
$180,000
$80,000
4
$700,000
$250,000
$180,000
$95,000
5
$850,000
$300,000
$180,000
$110,000
0
1
$3,000,000
($900,000)
$2,100,000
($180,000)
($1,000,000)
$920,000
($184,000)
$736,000
2
$6,000,000
($1,800,000)
$4,200,000
($315,000)
($5,200,000)
($1,315,000)
$263,000
($1,052,000)
3
$12,000,000
($3,600,000)
$8,400,000
($551,250)
($11,040,000)
($3,191,250)
$638,250
($2,553,000)
4
$24,000,000
($7,200,000)
$16,800,000
($964,688)
($17,776,000)
($1,940,688)
$388,138
($1,552,550)
5
$48,000,000
($14,400,000)
$33,600,000
($1,688,203)
($24,048,000)
$7,863,797
($1,572,759)
$6,291,038
Q4
Score
0
Below is an Income and cash flow statements that management has approved. (If there are errors or oversights, that is their
problem, not yours). Start each question from the original data. Cells F14:F22 contain the original values in case you need to get
back to them.
a Determine the unit price that would achieve a cash flow in week 6 of $500,000
b
Determine the sensitivity of the internal rate of return to a 10%, 25% and 50% increase in investment? (start with original
values)
c Determine the expected present worth for the following data where Forecast 1 is the current values. (start with original values)
Unit Price
COGS each
S.G. & A.
Sales Quantity Forecast year 1
Probability
Unit Price
COGS each
S.G.& A.
salvage
Income tax rate
Capital Gains Tax rate
Working capital
MARR
Investment
Sales Quantity Forecast
Depreciation MACRS
Forecast 1
(current Values)
$35.99
$12.50
$800,000
50,000
50%
$35.99
$12.50
$800,000
$100,000
35%
15%
no change
15%
$2,000,000
Forecast 2
Forecast 3
cell
$40.00
$15.00
$1,000,000
40,000
30%
$35.00
$11.50
$900,000
60,000
20%
C14
C15
C16
C23
in year 6
Cash Flow Statement
Net Income
Add depreciation
Investment
Change in Working Capital
Salvage
Tax on gain
Cash flow
Solution
103,680
11.52%
124,416
5.76%
3
$2,591,280
($900,000)
$1,691,280
($800,000)
($384,000)
$507,280
($177,548)
$329,732
4
$3,109,536
($1,080,000)
$2,029,536
($800,000)
($230,400)
$999,136
($349,698)
$649,438
5
$3,731,443
($1,296,000)
$2,435,443
($800,000)
($115,200)
$1,520,243
($532,085)
$988,158
6
$4,477,732
($1,555,200)
$2,922,532
($800,000)
($57,600)
$2,064,932
($722,726)
$1,342,206
($19,890)
$640,000
$329,732
$384,000
$649,438
$230,400
$988,158
$115,200
$1,342,206
$57,600
($179,950)
($35,990)
($43,188)
($51,826)
($62,191)
($2,000,000)
$203,475
$584,120
$670,544
$828,013
$1,041,167
($74,629)
$100,000
$15,000
$1,440,177
Present Worth =
$673,198
Income Statement
Sales revenue
Cost of goods sold
Gross Margin
General, Sales and Admin.
Depreciation
EBIT
Income tax
Net income
86,400
11.52%
IRR
23.95%
0
60,000
32.00%
1
$1,799,500
($625,000)
$1,174,500
($800,000)
($400,000)
($25,500)
$8,925
($16,575)
2
$2,159,400
($750,000)
$1,409,400
($800,000)
($640,000)
($30,600)
$10,710
($19,890)
($16,575)
$400,000
5
50,000
20.00%
Original Values
$35.99
$12.50
$800,000
$100,000
35%
15%
no change
15%
$2,000,000
72,000
19.20%
(2,000,000)
Q5 city bidge inspection team had noted 4 bridges that need replacement. Resources are available toScore of these. Proposals to repair
0
The
do one
them have been received as follows. Also shown are the number of vehicles per year that use each bridge that is an indicator of the size of
the problem if the bridge would fail. Using a 10 year time span and a discount rate (MARR) of 7%, which one should be chosen.
Proposal
Oak Strret Bridge
2nd Ave. Bridge
River Street Bridge
Lincon Avenue Bridge
Solution
Costs to Replace
$19,000,000
$20,000,000
$21,500,000
$22,000,000
Cars per year
14,500,000
14,000,000
16,000,000
16,500,000
Q7
a
b
c
d
e
Score
0
Evaluate the following Cash Flows using the criteria, MARR and cash flows stated in parts a-e . Parts a-d
should use a 6-year time span. Indicate for each part whether the proposal should be accepted or rejected.
Present Worth (PW)
Future Worth (FW)
Annual Worth (AW)
Internal rate of Return (IRR)
Discounted Payback by end of year 4
Solution
MARR
6%
8%
8%
12%
6%
0
($80,000)
($80,000)
($80,000)
($127,500)
($104,000)
1
$13,200
$20,000
$20,000
$19,800
$22,000
2
$19,800
$20,000
$20,000
$29,700
$26,000
Cash Flows in Year
3
4
$22,100
$25,000
$20,000
$20,000
$20,000
$20,000
$33,150
$37,500
$30,000
$35,000
5
$25,000
$20,000
$20,000
$37,500
$35,000
6
$20,000
$20,000
$20,000
$30,000
$35,000