Question 1
4/16/2010 Chapter 11. Ch 11-18 Build a Model Webmasters.com has developed a powerful new server that would be used for corporations? Internet activities. It would cost $10 million at Year 0 to buy the equipment necessary to manufacture the server. The project would require net working capital at the beginning of each year in an amount equal to 10% of the year's projected sales; for example, NWC0 = 10%(Sales1). The servers would sell for $24,000 per unit, and Webmasters believes that variable costs would amount to $17,500 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 3%. The company?s nonvariable costs would be $1 million at Year 1 and would increase with inflation. The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. The firm believes it could sell 1,000 units per year. The equipment would be depreciated over a 5-year period, using MACRS rates. The estimated market value of the equipment at the end of the project?s 4-year life is $500,000. Webmasters? federal-plus-state tax rate is 40%. Its cost of capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and high-risk projects at 13%. a. Develop a spreadsheet model, and use it to find the project?s NPV, IRR, and payback. Key Output: NPV = Part 1. Input Data (in thousands of dollars) IRR = MIRR = Equipment cost $10,000 Net WC/Sales 10% Market value of equipment at Year 4 $500 First year sales (in units) 1,000 Tax rate 40% Sales price per unit $24.00 WACC 10% Variable cost per unit $17.50 Inflation 3.0% Nonvariable costs $1,000 Part 2. Depreciation and Amortization Schedule Years Accum'd Year Initial Cost 1 2 3 4 Depr'n Equipment Depr'n Rate 20.0% 32.0% 19.0% 12.0% Equipment Depr'n, Dollars Ending Bk Val: Cost ? Accum Dep'rn Part 3. Net Salvage Values, in Year 4 Equipment Estimated Market Value in Year 4 Book Value in Year 4 Expected Gain or Loss Taxes paid or tax credit Net cash flow from salvage Part 4. Projected Net Cash Flows (Time line of Annual Cash Flows) Years 0 1 2 3 4 Investment Outlays at Time Zero: Equipment Operating Cash Flows over the Project's Life: Units sold Sales price Variable costs Sales revenue Variable costs Nonvariable operating costs Depreciation (equipment) Oper. income before taxes (EBIT) Taxes on operating income (40%) After-tax operating income Add back depreciation Operating cash flow Terminal Year Cash Flows: Required level of net working capital Required investment in NWC Terminal Year Cash Flows: Net salvage value Net Cash Flow (Time line of cash flows) Part 5. Key Output: Appraisal of the Proposed Project Net Present Value (at 10%) IRR MIRR Payback (See calculation below) 3 Data for Payback Years 0 1 2 3 4 Net cash flow Cumulative CF 0 Part of year required for payback "b. Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold. Set these variables? values at 10% and 20% above and below their base-case values. Include a graph in your analysis." Part 6. Evaluating Risk: Sensitivity Analysis "I. Sensitivity of NPV to Changes in Inputs. Here we use Excel ""Data Tables"" to find NPVs at different unit sales, WACC, variable costs, sales price and nonvariable costs--changing one variable at a time, holding other things constant." % Deviation 1st YEAR UNIT SALES % Deviation WACC from Units NPV from NPV Base Case Sold $0 Base Case WACC $0 -20% 0 -20% 0 -10% 0 -10% 0 0% 0 0% 0 10% 0 10% 0 20% 0 20% 0 % Deviation VARIABLE COST % Deviation SALES PRICE from Variable NPV from Sales NPV Base Case Costs $0 Base Case Price $0 -20% 0 -20% 0 -10% 0 -10% 0 0% 0 0% 0 10% 0 10% 0 20% 0 20% 0 Note about data tables. The data in the column input should NOT be input using a cell reference to the column input cell. For example, the base case number of units sold in Cell B105 should be the number 1000; you should NOT have the formula =D29 in that cell. This is because you'll use D29 as the column input cell in the data table and if Excel tries to iteratively replace Cell D29 with the formula =D29 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel won't tell you that there is a problem, so you'll just get the wrong values for the data table! % Deviation NONVARIABLE COST from Fixed NPV Base Case Costs $0 -20% 0 -10% 0 0% 0 10% 0 20% 0 Deviation NPV at Different Deviations from Base from Sales Variable Nonvariable Base Case Price Cost/Unit Units Sold Cost WACC -20% $0 $0 $0 $0 $0 -10% 0 0 0 0 0 0% 0 0 0 0 0 10% 0 0 0 0 0 20% 0 0 0 0 0 Range "c. Now conduct a scenario analysis. Assume that there is a 25% probability that best-case conditions, with each of the variables discussed in Part b being 20% better than its base-case value, will occur. There is a 25% probability of worst-case conditions, with the variables 20% worse than base, and a 50% probability of base-case conditions." Part 7. Evaluating Risk: Scenario Analysis Squared Deviation Sales Unit Variable Times Scenario Probability Price Sales Costs NPV Probability Best Case 25% $28.80 1,200 $14.00 Base Case 50% $24.00 1,000 $17.50 Worst Case 25% $19.20 800 $21.00 Expected NPV = sum, prob times NPV Standard Deviation = Sq Root of column H sum Coefficient of Variation = Std Dev / Expected NPV d. If the project appears to be more or less risky than an average project, find its risk-adjusted NPV, IRR, and payback. CV range of firm's average-risk project: 0.8 to 1.2 Low-risk WACC = 8% WACC = 10% High-risk WACC = 13% Risk-adjusted WACC = Risk adjusted NPV = IRR = Payback = e. On the basis of information in the problem, would you recommend that the project be accepted?
Question 2
Problem 25-4 "DEAR TUTOR ATTACHED IS A WORD DOCUMENT WITH THE SAME PROBLEM BELOW , THE WORD DOCUMENT HAS A CLEARER FORMAT OF THE PROBLEM,PLEASE PLACE ANSWER IN A EXCEL SPREADSHEET THANK YOU FOR YOUR HELP" Real Options: Decision-Tree Analysis eBook Utah Enterprises is considering buying a vacant lot that sells for $1.3 million. If the property is purchased, the company's plan is to spend another $6 million today (t = 0) to build a hotel on the property. The after-tax cash flows from the hotel will depend critically on whether the state imposes a tourism tax in this year's legislative session. If the tax is imposed, the hotel is expected to produce after-tax cash inflows of $715,000 at the end of each of the next 15 years, versus $1,105,000 if the tax is not imposed. The project has a 12% cost of capital. Assume at the outset that the company does not have the option to delay the project. Use decision-tree analysis to answer the following questions. What is the project's expected NPV if the tax is imposed? Round your answer to the nearest cent. $ What is the project's expected NPV if the tax is not imposed? Round your answer to the nearest cent. $ Given that there is a 50% chance that the tax will be imposed, what is the project's expected NPV if they proceed with it today? Round your answer to the nearest cent. $ Although the company does not have an option to delay construction, it does have the option to abandon the project 1 year from now if the tax is imposed. If it abandons the project, it would sell the complete property 1 year from now at an expected price of $8.3 million. Once the project is abandoned, the company would no longer receive any cash inflows from it. If all cash flows are discounted at 12%, would the existence of this abandonment option affect the company's decision to proceed with the project today? Assume that there is no option to abandon or delay the project, but that the company has an option to purchase an adjacent property in 1 year at a price of $1.5 million. If the tourism tax is imposed, then the net present value of developing this property (as of t = 1) is only $200,000 (so it wouldn't make sense to purchase the property for $1.5 million). However, if the tax is not imposed, then the net present value of the future opportunities from developing the property would be $3 million (as of t = 1). Thus, under this scenario it would make sense to purchase the property for $1.5 million. Given that cash flows are discounted at 12% and that there?s a 50-50 chance the tax will be imposed, how much would the company pay today for the option to purchase this property 1 year from now for $1.5 million? Round your answer to the nearest cent. $
Question 3
As a financial analyst, you have just been handed the 2008 financial report of the Firm Z, a large, global pharmaceutical company. Firm Z competes in both traditional pharmaceutical products and in evolving biotechnology products. The following data (in billions) on Firm Z and the pharmaceutical industry are available: Firm Z Industry Average Sales $2.00 $0.960 Net incme 0.54 0.096 Advertising 0.04 0.160 Research and development 0.16 0.240 New investment in facilities 0.20 0.240 Given these data, evaluate the cost management performance of Firm Z. I put answer sheet in the browse,Michael this is my second time sending this. I sent an answer sheet along with the question, This is late work. As a financial analyst, you have just been handed the 2008 financial report of the Firm Z, a large, global pharmaceutical company. Firm Z competes in both traditional pharmaceutical products and in evolving biotechnology products. The following data (in billions) on Firm Z and the pharmaceutical industry are available: Firm Z Industry Average Sales $2.00 $0.960 Net incme 0.54 0.096 Advertising 0.04 0.160 Research and development 0.16 0.240 New investment in facilities 0.20 0.240 Given these data, evaluate the cost management performance of Firm Z. I put answer sheet in the browse.
Question 4
Several months ago, Deb Forrester received a substantial sum of money from the estate of her late aunt. Deb initially placed the money in a savings account because she was not sure what to do with it. Since then, however, she has taken a course in investments at the local university. The textbook for the course was, in fact, this one, and the class just completed Chapter 9. Excited about what she has learned in class, Deb has decided that she definitely wants to invest in stocks. But before she does, she wants to use her newfound knowledge in technical analysis to determine whether now would be a good time to enter the market. Deb has decided to use all 5 of the following measures to help her determine if now is, indeed, a good time to start putting money into the stock market: ? Dow theory ? Advance-decline line ? New highs-new lows (NH-NL) indicator (Assume the current 10-day moving average is zero and the last 10 periods were each zero.) ? Arms index ? Mutual fund cash ratio Deb goes to the Internet and, after considerable effort, is able to put together the table of data as seen below. Questions a. Based on the data presented in the table, calculate a value (where appropriate) for periods 1 through 5, for each of the five measures listed above. (Hint: There are no values to compute for the Dow theory; just plot the averages.) Chart your results, where applicable. b. Discuss each measure individually and note what it indicates for the market, as it now stands. Taken collectively, what do these 5 measures indicate about the current state of the market? According to these measures, is this a good time for Deb to consider getting into the market, or should she wait a while? Explain. c. Comment on the time periods used in the table, which are not defined here. What if they were relatively long intervals of time? What if they were relatively short? Explain how the length of the time periods can affect the measures. Period 1 Period 2 Period 3 Period 4 Period 5 Dow Industrial Average 8,300 7,250 8,000 9,000 9,400 Dow Transportation Average 2,375 2,000 2,000 2,850 3,250 New highs 68 85 85 120 200 New lows 75 60 80 75 20 Volume up 600,000,000 6,254,123 275,637,497 875,365,980 1,159,534,297 Volume down 600,000,000 263,745,877 824,362,503 424,634,020 313,365,599 Mutual fund cash (trillions of dollars) $0.31 $0.32 $0.47 $0.61 $0.74 Total assets managed (trillions of dollars) $6.94 $6.40 $6.78 $6.73 $7.42 Advancing issues (NYSE) 1,120 1,278 1,270 1,916 1,929 Declining issues (NYSE) 2,130 1,972 1,980 1,334 1,321
Question 5
I need the answers to the following E23-20 & CP23-36: 1. Consider the following additional information: Static budget variable overhead $ 5,500 Static budget fixed overhead $ 22,000 Static budget direct labor hours 550 hours Static budget number of units 22,000 units Great Fender allocates manufacturing overhead to production based on standard direct labor hours. Great Fender reported the following actual results for 2014: actual variable overhead, $4,950; actual fixed overhead, $23,000. Requirements 1. Compute the overhead variances for the year: variable overhead cost variance, variable overhead efficiency variance, fixed overhead cost variance, and fixed overhead volume variance. FOH Vol. Var. $2,000 U ________________________________________________________________________________________ 2. Assume Davis has created a standard cost card for each job. Standard direct materials include 14 software packages at a cost os $900 per package. Standard direct labor costs per job include 90 hours at $120 per hour. Davis plans on completing 12 jobs during March 2013. Actual direct materials costs for March include 90 software packages at a total cost of $81,450. Actual direct costs included 100 hours per job at an average rate of $125 per hour. Davis completed all 12 jobs in March. Requirements 1. Calculate direct materials cost and efficiency variances. 2. Calculate direct labor cost and efficiency variances. 3. Prepare journal entries to record the use of both materials and labor for March for the company.
