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
, VALUING AND AMERIAN OPTION J&B Drilling Company has recently acquired a lease to drill for natural gas in a remote region of southwest Louisiana and southeast Texas. The area has long been known for oil and gas production, and the company is optimistic about the prospects of the lease. The lease contract has a three-year life and allows J&B to begin exploration at any time up until the end of the three-year term. J&B?s engineers have estimated the volume of natural gas they hope to extract from the leasehold and have placed a value of $25 million on it, on the condition that explorations begin immediately. The cost of developing the property is estimated to be $23 million (regardless of when the property is developed is developed over the next three years). Bases on historical volatilities in the returns of similar investments and other relevant information, J&B?s analysts have estimated that the value of the investment opportunity will evolve over the next three years. The risk-free rate of interest is currently 5%, and the risk-neutral probability of an uptick in the value of the investment is estimated to be 46.26%. A. Evaluate the value of the leasehold as an American call option. What is the Lease worth today? B. As one of J&B?s analysts, what is your recommendation as to when the company should drilling?
Question 3
Please help me. I do not understand this. Fastenalt is an industrial supply manufacturer that provides HVAC Specialty Thermostats to manufacturers and retailers. Fastenalt has experienced substantial growth in the past three years and is known for its high quality thermostats and reliable on-time delivery. These characteristics have resulted in high customer satisfaction. Fastenalt focuses on the strategic objectives of quality, reliability and growth. Fastenalt's operating capacity is 4,000 thermostats per month and is currently selling 3,500 thermostats each month. Fastenalt has received a request for a special order of 800 specialty thermostats for $150,000 from Hank?s Retailer. Hank?s is the largest hardware retailer in the metropolitan area and surrounding region. Hank?s is not a current customer of Fastenalt's. Production costs for the thermostats would be the same however Fastenalt would incur additional set-up costs of $20,000 to complete Hank?s order. No marketing costs would be associated with the special order. If Fastenalt accepts the special offer, Hank?s requires that Fastenalt fill the entire order of 800 units. The following information is for Fastenalt?s current operations: Sales and Production data for 4,000 specialty thermostats Sales Price: $250 amounts per unit (Thermostat) Direct Materials: $ 64 amounts per unit (Thermostat) Direct Labor: $ 50 amounts per unit (Thermostat) Variable overhead: $35 amounts per unit (Thermostat) Fixed overhead: $25 amounts per unit (Thermostat) Variable marketing: $15 amounts per unit (Thermostat) Fixed marketing: $12 amounts per unit (Thermostat) Questions: 1. Does Fastenalt have the capacity to accept the special order from Hank? 2. If Fastenalt accepts Hank?s special order, what is Fastenal's cost from lost sales of current customers? 3. Using a relevant cost analysis should Fastenalt accept Hank?s special order? 4. If Fastenalt does not have excess capacity to accept Hank?s offer, what is the minimum price Fastenalt should accept from Hank?s for the special order? 5. If Fastenalt has excess capacity, what is the minimum price Fastenalt should accept from Hank?s for the special order? 6. Refer back to Fastenalt's original capacity of 4,000 units. Discuss the strategic implications of accepting Hank's offer. 7. Discuss the strategic implications of rejecting Hank's offer.,Thank you so much! Please help me understand this. Thank you!
Question 4
can you help me solve part [b] of this question. please include the equation before you apply the number into the equation, please explain each step in details and please draw the cash flow diagram, which represent the years. thank you very,dear please clarify the following : 1- re-write the function PVIFA in equation , im not apple to use excel in my exam , it will be no computer available :( 2- you used same step of finding part [a] to find PV, while the requirement is to find the equivalent uniform annual value of all costs!! not the PV. are they the same ??? please clarify , please my situation is critical i cannot fail this exam .. waiting your reply and thank you very much for your help.,..take ur time to reply wt the answer .. Thank u,thank you ..first concern you answered very satisfied , but second concern you didn't answer it for me therefore im copying it from my previous concern bellow: [[2- you used same step of finding part [a] to find PV, while the requirement is to find the equivalent uniform annual value of all costs!! not the PV. are they the same ??? please clarify , please my situation is critical i cannot fail this exam .. ]] .. thank you .,thank you ...
Question 5
Dan, a lawyer, owns real estate with a basis of $10,000 and a fair market value of $18,000. Elite has outstanding 100 shares, all held by Mr.Able. Alite issues 400 additional shared of its common stock (having a fair market value of $18,000) to Dan in exchange for his property worth $18,000 a. Dan does not qualify for IRC section 351 treatment because he has transferred his property to Elite in a seperate and distinct transaction from MR. Able b. Dan qualifies for Section 351 treatment because the acquired "control" of Elite and Mr. Able must file amendment returns covering his previous transfers to Elit due to his loss of control c. The gain realized on the transfer is recognized in full by Dan because he occasionally renders legal services to Elite d. The transfer is not taxable to Dan or Elit due to the application of Section 351 and 1032,Dan, a lawyer, owns real estate with a basis of $10,000 and a fair market value of $18,000. Elite has outstanding 100 shares, all held by Mr.Able. Alite issues 400 additional shared of its common stock (having a fair market value of $18,000) to Dan in exchange for his property worth $18,000 what is Dan's adjusted basis in his Elit shares and what is Elite's adjusted basis in the real estate acqurired from Dan?,Dan, a lawyer, owns real estate with a basis of $10,000 and a fair market value of $18,000. Elite has outstanding 100 shares, all held by Mr.Able. Alite issues 400 additional shared of its common stock (having a fair market value of $18,000) to Dan in exchange for his property worth $18,000 How much gain, if any, would Dan have recognized if he transferred the real estate to Elit subject to an exisitng indebtedness of $14,000 and what is adjusted basis of Dan and Elite?
