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TMAN 625 Final Exam, Spring 2015 | Complete Solution
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Question 1                    Score    0
Money-Maker Hedge fund has narrowed down their investment decision to three proposals from which two are to be selected.  The investment amounts, estimated annual cash flows, and estimated salvage values for the three proposals are shown below.  A MARR of 16% and a six year time-span is to be used.  Unused fund should be ignored since they will be returned to investors.
Determine which two should be chosen to maximize the financial worth of the company?
Proposal    Investment    Annual cash flow    Salvage in last year
A1    (\$1,750,000)    \$484,000     \$55,000
A2    (\$1,550,000)    \$435,000     \$0
A3    (\$2,250,000)    \$615,000     \$70,000

MARR    16.0%
Years    6

Solution

Question 2                    Score    0
Storm Occurrence Services (SOS) offers services to secure houses and properties when major storms are forecast for an area.  They do such things as fasten plywood over windows, install pumps and  generators, trim  and brace trees, etc.  They keep an inventory of trailers, tools and supplies year round which incur annual maintenance and repair costs.  Additional supplies are purchased locally at  the time of each storm preparation.  Staff are "on-call" when the storms are forecasted.  Financial data is shown below.
Price            Examples
Price for each storm per customer    \$1,000
Quantity
Number of storms * Number of customers        (e.g. 4 storms *20 customers would be a quantity of 80)

Supplies per customer per storm    \$250
Labor per customer per storm    \$500
Maintenance and storage    \$50,000     Annual

a    What would be the annual profit  for a season in which there are 5 major storms in a year and they had 50 customers?
b    How many customers are needed to break even if there are 3 major storms in a storm season?

Solution

Question 3                    Score    0
Awesome Gadget, Inc. is considering making a \$750,000 investment in its production capabilities to produce a new product line.   Forecasted sales quantities for the new product are shown below. The tax rate, working capital, and MARR are also shown below.
The price per unit will be \$39.99 for all 3 upcoming years. COGS per unit is forecast to be \$24.75 for the upcoming three years.
SG&A, excluding depreciation,  will be \$950,000 in year 1 and increased arithmetically by \$50,000 in the following two years.   Depreciation for each year is to be recorded as straight line over three years.  The salvage value is zero.
Using this data, prepare a three year proposal income statement (only) for years 1-3.  The income statement must be in the standard accounting sequence and format with appropriate subtotals and totals.
Years    0    1    2    3
Forecasted sales quantities        90,000    120,000    150,000
Working capital    \$700,000.00     \$720,000.00     \$740,000.00     \$750,000.00
Income Tax rate    14.00%
MARR    20.00%

Solution

Question 4                    Score    0
Fresh Organic Farm Foods, Inc. is considering extending into a new sales region. To do this they would add an additional salesperson at \$150,000 annually (includes all benefits and travel expenses). Also needed is an additional office in this new sales region that would cost \$100,000 annually, which includes an telephone answering service. This proposal would not involve any new depreciable assets.
Revenue from the new sales regions estimated at \$500,000 in year-1, \$600,000 in year-2, and \$750,000 in both year-3 and year-4. COGS is 50% of the revenue that includes delivery costs from existing warehouses.
Accounts receivable is forecasted to be 25% of revenue. Accounts Payable is forecast to be 20% of the cost of goods sold.  Food Inventory is forecast at 35% of revenue. Wages payable is forecasted at 15% of the salespersons salary. The Year 0 values  of working of these are all zero since this is a new sales region.
A proposal income statement for a proposal time span of 4 years is shown below. Use a tax rate of 25% and a MARR of 10%.
a    Prepare a cash flow statement.
b    Determine the present worth.
c    Discuss in one or two sentences which item(s) particularly affect the decision to accept or reject?

Year    0    1    2    3    4
Revenue        \$500,000     \$600,000     \$750,000     \$750,000
COGS    50%    of revenue
Salesperson Salary    \$150,000
Office rental    \$100,000
Proposal life span     4    years
Income tax rate    25%    annually
MARR    10%    annually (EAR)

Income Statement
Year    0    1    2    3    4
Revenue in new region        \$500,000     \$600,000     \$750,000     \$750,000
COGS        (\$250,000)    (\$300,000)    (\$375,000)    (\$375,000)
Gross Margin        \$250,000     \$300,000     \$375,000     \$375,000
Sales Person Salary        (\$150,000)    (\$150,000)    (\$150,000)    (\$150,000)
Office Rental        (\$100,000)    (\$100,000)    (\$100,000)    (\$100,000)
EBIT        \$0     \$50,000     \$125,000     \$125,000
Income Taxes        \$0     (\$12,500)    (\$31,250)    (\$31,250)
Net Income        \$0     \$37,500     \$93,750     \$93,750

Solution

Question 5                    Score    0
Armen's Armenian Restaurant often has a line of customers waiting to get seated.  There is an adjacent store front that could be rented to expand their business. The added space would enable sales to be increased to the amounts shown below. The year 0 (present year) sales of \$600,000 would continue as shown if the proposal is not implemented.
The present kitchen facilities can be expanded and enhanced to handle the added volume. The investment needed for the kitchen enhancements, additional tables and booths, and renovations is \$250,000. Consider this as depreciable over 5 years using MACRS.
COGS including wait staff and food is 35% of revenue. Annual rent, cleaning, etc. is presently \$200,000 annually and would increase to be \$350,000 with the added space.  Working capital considerations are minimal and should be omitted.
Income taxes rate is 12.5%. Any capital gains will be insignificant and should be ignored. A MARR of 6% should be used.
Determine if the proposal is financially justified using the following data and a 3-year time span.

Year    1    2    3    4
Revenue    \$600,000     \$800,000     \$1,000,000     \$1,200,000
MARR: 5 year    Percentage    20%    32%    19.20%    11.52%

Solution

Question 6                    Score    0
Smart Phone, Inc. is considering a new phone model to be aimed at the senior citizen market to be called the "Wise-Phone".    The new phone would not have a camera, GPS capabilities and other capabilities that require special hardware/chips.  It simply would be a good user-friendly wireless telephone with a touch screen.
A market research study determined that there indeed was a market for such a phone as a substantial number of users in this market segment only use the telephone capabilities. The downside is that it would result in a decrease in demand for the present "Smart" model.
A one-time investment in year 0 for introducing the new product would require \$250,00,000. This investment is not depreciable.
The price of the "Smart phone is \$125 and the price of the "Wise" phone would be \$50.
The COGS of the If the 'Smart" phone is 40% of it revenue and the "Wise" phone is 60% of its revenue.   The addition of the "Wise" phone would increase the S.G.& A. from \$500,000  \$575,000 .
Determine if this proposal is financially justified using a 4-year time span.

Price "Smart" phone    \$125
Price  "Wise" phone    \$50
0    1    2    3    4
Sales quantity without Wise        20,000     24,000     28,000     30,000
Sales quantity with Wise
Smart        19,000     22,000     25,000     37,500
Wise        7,500     9,000     10,500     12,000
Smart COGS    40%    of its revenue
Wise COGS    60%    of its revenue
Smart SG&A    \$500,000
Wise and Smart SG&A    \$575,000
Investment in year 0    \$250,000
Income tax rate    17%
MARR    12%

Solution

Question 7                    Score    0
Two alternative replacement machines are described below that are being considered to replace a current one that has no salvage value.    The present machine must be replaced and the replacement will not have any effect on quantity produced, quantity sold, revenue,  nor S.G.& A. (except depreciation).  The cost of the replacement machine will be depreciated using 5-year MACRS. The project evaluation time span should be 3 years.
Machine A, while  less expensive at \$100,000, only has a life span of 3 years.  Its salvage value at the end of three years is \$7,500. The annual COGS using this machine will be \$8,500.
Machine B is more expensive at \$150,000 but will last 6 years and has a lower annual operating costs. Its worth (salvage value) at the end of three years is \$60,000. The annual COGS using this machine will be \$5,000.
Performa a financial analysis to determine the better alternative from a financial perspective. Use a MARR of 13%, income tax rate of 30% and a capital gains tax rate of 15%.

Data block
MARR=    13.00%
Income Tax rate    30.0%
Capital Gains rate    15.0%
Time span    3    years
Machine    A    B
Purchase Cost    \$100,000     \$150,000
Salvage Value    \$7,500     \$60,000     end of year-3
Annual COGS    \$8,500     \$5,000
3-year MACRS    Year    1    2    3
Percentage    33.33%    44.45%    14.81%
Solution

Question 8                    Score    0
Below are Income and cash flow statements for a new product model.  Management has approved these statements but wants to look at some alternatives.   The cells with a shaded background in column D contain the original values and are shown only to assist you in reverting back to the original values if needed.  All question parts should start from the original data.
a     Determine the unit price to attain a  PW = \$250,000.  Describe how you determined this.
b    Starting with the original values, determine the COGS each for which the present worth is zero.  Describe how you determined this.
c    Two estimates  are shown below of the Sales Quantity in year 1, and the Sales Quantity Annual Increase. The two estimates are equally probable.  Using these two estimates, determine the expected present worth. Start with the original values.
Estimates    1    2
Sales quantity in Year 1    35000    45000
Sales Quantity Annual Increase    20%    25%

Model
Copy of Original Values
Sales quantity in Year 1    35,000     35,000
Sales Quantity Annual Increase    20%    20%
Unit Price (all years)    \$40.00     \$40.00
COGS each    \$12.00     \$12.00
S.G.& A.    \$750,000     \$750,000
Income tax rate    20%    20%
MARR    15%    15%        0
Investment    \$2,000,000     \$2,000,000
Years    0    1    2    3    4    5    6
Sales Quantity Forecast        35,000     42,000     50,400     60,480     72,576     87,091
Depreciation 5-year MACRS        20.00%    32.00%    19.20%    11.52%    11.52%    5.76%
Book Value        \$1,600,000     \$960,000     \$576,000     \$345,600     \$115,200     \$0

Income Statement    0    1    2    3    4    5    6
Sales revenue         \$1,400,000     \$1,680,000     \$2,016,000     \$2,419,200     \$2,903,040     \$3,483,648
Cost of goods sold         (\$420,000)    (\$504,000)    (\$604,800)    (\$725,760)    (\$870,912)    (\$1,045,094)
Gross Margin        \$980,000     \$1,176,000     \$1,411,200     \$1,693,440     \$2,032,128     \$2,438,554
General, Sales and Admin.        (\$750,000)    (\$750,000)    (\$750,000)    (\$750,000)    (\$750,000)    (\$750,000)
Depreciation         (\$400,000)    (\$640,000)    (\$384,000)    (\$230,400)    (\$230,400)    (\$115,200)
EBIT        (\$170,000)    (\$214,000)    \$277,200     \$713,040     \$1,051,728     \$1,573,354
Income tax         \$34,000     \$42,800     (\$55,440)    (\$142,608)    (\$210,346)    (\$314,671)
Net income         (\$136,000)    (\$171,200)    \$221,760     \$570,432     \$841,382     \$1,258,683

Cash Flow Statement
Net Income        (\$136,000)    (\$171,200)    \$221,760     \$570,432     \$841,382     \$1,258,683
Add depreciation         \$400,000     \$640,000     \$384,000     \$230,400     \$230,400     \$115,200
Investment    (2,000,000)
Change in Working Capital        (\$140,000)    (\$28,000)    (\$33,600)    (\$40,320)    (\$48,384)    (\$58,061)
Cash flow     (\$2,000,000)    \$124,000     \$440,800     \$572,160     \$760,512     \$1,023,398     \$1,315,822

Present Worth =    IRR
\$329,840     19.4%

Solution

Question 9                    Score
The city maintenance department team has noted four major intersections that have high accident rates.  Staff are sufficient to supervise one major intersection improvement project each year.  Shown below are the cost estimates to repair them. Also shown are the average number of accidents per year at each of the intersections. These accident counts should be considered as the number of accidents that could be avoided if an intersection is rebuilt.  Which intersection should be chosen first to be rebuilt?

Proposal    Costs to Replace    Accidents per year
Oak and Elm    \$1,900,000     84
Commerce and 8th    \$1,875,000     78
River and 32nd    \$2,150,000     95
Lincoln and Carter    \$2,000,000     97
Great Rock and 3rd    \$1,400,000     68
Good Hill and 101st    \$2,400,000     105
2nd and Main    \$1,500,000     65

Solution

Question 10
A recent newspaper article suggested that some hedge funds that purchase companies are asking (forcing?) vendors of the purchased companies to accept payments terms of Net 90 or Net 120, meaning that the customer would have 90 or 120 days respectively to pay the vendor for a purchase.  Traditionally, payment terms have been Net 30.   Why would this change be requested? Discuss how this would affect the financial statements of the customer and vendor? Post your answer below or in a separate MS Word document.

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TMAN 625 Final Exam, Spring 2015 | Complete Solution
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