1.
Ann and Marie have created an online business re-selling tablet computers for the elderly that have been retrofitted to be extremely easy to use yet contain the basic needed functions. The sales price and quantity sold in their first year of business are shown below. Although they did not keep very good records, they estimate their costs and expenses in the coming year will be as follows.
Data Block
Sales price $500 each
Quantity sold 100
Tablet purchase $350 each
Apps $25 each
Labor $25 each
Marketing $80,000 annual
Equipment and Facilities $50,000 annual
a What was the profit per tablet that was sold last year using the costs listed above?
b What is the breakeven quantity with the above data?
c What would they have to charge for each retrofitted tablet next year to break even if 1,000 are sold?
2.
Best Biotechnology Corporation (BBC) has a new potential product developed by their research group that they are considering migrating from the lab into production. The expected cash flow is shown below.
IF BBC evaluates proposals using a discounted payback period approach where projects of this size must have a discounted payback in 4 years with a MARR of 16%. Should the product be put into production based on this data?
Year
0
1
2
3
4
5
Free Cash Flow
($80.0)
($30.0)
$5.0
$50.0
$100.0
$200.0
MARR
16%
3.
Precision Parts Manufacturing (PPM), is going to install a network server for all their machine tools and robots. They can either purchase the hardware/software, or lease it with monthly (end of month) payments for 4 years from the vendor. In addition to the cost of the hardware/software, depreciable upfront implementation costs will be incurred for both the leasing and purchasing alternatives, and will be performed in the same year as purchased or leased.
The data is shown below where no change in working capital is expected. A MACRS 3-year deprecation schedule will be used. If PPM uses a MARR of 15%, a tax rate of 20% for both Income and Capital gains, and a 4-year times span for evaluating proposals, should the networking system be purchased or leased using a present worth criterion.
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%
Price Hardware/software
$650,000
Installation (depreciable)
$300,000
Lease Payments
$6,000
monthly
Salvage value in year 4
$50,000
MARR
15%
Tax rates
20%
4.
The investment Committee for the Herrera Hedge Fund (HHF) has 5 proposals from which to choose to be funded with $10 billion in capital that they have recently raised. Assume any funds not invested will earn 0% interest. Their only criteria for investments at Herrera is the internal rate of return with the minimal acceptable rate of return being 20%. Which alternative(s) should be funded if the projects have the following forecasted cash flows. All values are in billions of dollars although adding all the zeroes will not change the answer.
Cash Flows
Project
Investment
1
2
3
4
5
Uno
($40)
$15
$15
$15
$15
$15
Dos
($30)
$4
$10
$12
$13
$13
Tres
($50)
$40
$10
$10
$10
$5
Cuadro
($70)
$20
$25
$30
$30
$30
Cinco
($20)
$9
$8
$7
$6
$5
5.
Bob, the new Chief Marketing Officer at the XYZ company has proposed an expansion of the companies marketing efforts. He claims that an investment of $1,000,000 in marketing research this year, and following this with an increase in marketing expenditures of $250,000 a year will increase sales by 10% each year over the sales forecasted without the marketing program. The sales forecasts and costs are shown below. The market research study is not depreciable but should be considered as an investment in year 0.
Should Bob's plan be approved using the PW and IRR criteria using a 4-year analysis.
Year
0
1
2
3
4
Revenue without Marketing program
$18,000,000
$20,000,000
$22,000,000
$24,000,000
$26,000,000
Proposal increase in revenue
10%
Revenue with Marketing program
$18,000,000
$22,000,000
$24,200,000
$26,400,000
$28,600,000
COGS percentage of revenues
48%
S.G.A.
(no change)
Market Research
$1,000,000
Annual Marketing Increase
$250,000
MARR
16%
Tax
14%
Working Capital (all kinds)
45%
of revenue
6.
The CEO of Quality Pharmaceuticals Inc. (QPI) is getting pressure from the Board of Directors to reduce costs. It has been suggested that production be moved off shore to save costs. Data has been collected concerning the off-shore alternative and the costs presently being incurred with domestic production. The relevant costs are shown below. There would not be any investment involved and revenues are not expected to change. Inventory is expected to increase, but no chan
7
8
9
10.
How can financial analysis assist companies to in the justification of new technologies, or the opposite of help to resist new technologies? What is the role of an IT specialist in this decision making process? Provide an example of this interaction. Answer below or in a MS Word document.
Ann and Marie have created an online business re-selling tablet computers for the elderly that have been retrofitted to be extremely easy to use yet contain the basic needed functions. The sales price and quantity sold in their first year of business are shown below. Although they did not keep very good records, they estimate their costs and expenses in the coming year will be as follows.
Data Block
Sales price $500 each
Quantity sold 100
Tablet purchase $350 each
Apps $25 each
Labor $25 each
Marketing $80,000 annual
Equipment and Facilities $50,000 annual
a What was the profit per tablet that was sold last year using the costs listed above?
b What is the breakeven quantity with the above data?
c What would they have to charge for each retrofitted tablet next year to break even if 1,000 are sold?
2.
Best Biotechnology Corporation (BBC) has a new potential product developed by their research group that they are considering migrating from the lab into production. The expected cash flow is shown below.
IF BBC evaluates proposals using a discounted payback period approach where projects of this size must have a discounted payback in 4 years with a MARR of 16%. Should the product be put into production based on this data?
Year
0
1
2
3
4
5
Free Cash Flow
($80.0)
($30.0)
$5.0
$50.0
$100.0
$200.0
MARR
16%
3.
Precision Parts Manufacturing (PPM), is going to install a network server for all their machine tools and robots. They can either purchase the hardware/software, or lease it with monthly (end of month) payments for 4 years from the vendor. In addition to the cost of the hardware/software, depreciable upfront implementation costs will be incurred for both the leasing and purchasing alternatives, and will be performed in the same year as purchased or leased.
The data is shown below where no change in working capital is expected. A MACRS 3-year deprecation schedule will be used. If PPM uses a MARR of 15%, a tax rate of 20% for both Income and Capital gains, and a 4-year times span for evaluating proposals, should the networking system be purchased or leased using a present worth criterion.
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%
Price Hardware/software
$650,000
Installation (depreciable)
$300,000
Lease Payments
$6,000
monthly
Salvage value in year 4
$50,000
MARR
15%
Tax rates
20%
4.
The investment Committee for the Herrera Hedge Fund (HHF) has 5 proposals from which to choose to be funded with $10 billion in capital that they have recently raised. Assume any funds not invested will earn 0% interest. Their only criteria for investments at Herrera is the internal rate of return with the minimal acceptable rate of return being 20%. Which alternative(s) should be funded if the projects have the following forecasted cash flows. All values are in billions of dollars although adding all the zeroes will not change the answer.
Cash Flows
Project
Investment
1
2
3
4
5
Uno
($40)
$15
$15
$15
$15
$15
Dos
($30)
$4
$10
$12
$13
$13
Tres
($50)
$40
$10
$10
$10
$5
Cuadro
($70)
$20
$25
$30
$30
$30
Cinco
($20)
$9
$8
$7
$6
$5
5.
Bob, the new Chief Marketing Officer at the XYZ company has proposed an expansion of the companies marketing efforts. He claims that an investment of $1,000,000 in marketing research this year, and following this with an increase in marketing expenditures of $250,000 a year will increase sales by 10% each year over the sales forecasted without the marketing program. The sales forecasts and costs are shown below. The market research study is not depreciable but should be considered as an investment in year 0.
Should Bob's plan be approved using the PW and IRR criteria using a 4-year analysis.
Year
0
1
2
3
4
Revenue without Marketing program
$18,000,000
$20,000,000
$22,000,000
$24,000,000
$26,000,000
Proposal increase in revenue
10%
Revenue with Marketing program
$18,000,000
$22,000,000
$24,200,000
$26,400,000
$28,600,000
COGS percentage of revenues
48%
S.G.A.
(no change)
Market Research
$1,000,000
Annual Marketing Increase
$250,000
MARR
16%
Tax
14%
Working Capital (all kinds)
45%
of revenue
6.
The CEO of Quality Pharmaceuticals Inc. (QPI) is getting pressure from the Board of Directors to reduce costs. It has been suggested that production be moved off shore to save costs. Data has been collected concerning the off-shore alternative and the costs presently being incurred with domestic production. The relevant costs are shown below. There would not be any investment involved and revenues are not expected to change. Inventory is expected to increase, but no chan
7
8
9
10.
How can financial analysis assist companies to in the justification of new technologies, or the opposite of help to resist new technologies? What is the role of an IT specialist in this decision making process? Provide an example of this interaction. Answer below or in a MS Word document.
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