Below are the data block, income statement and cash flow statement from the fro

Question

Below are the data block, income statement and cash flow statement from the fro forma example in the Week 8 content. The Angel Investor, that is investing a million dollars, has asked for some further information. Two scenarios are of interest that concern the revenues effect on the ending cash flow amounts during the five years. The two scenarios , in addition to the "Current" one that is in the statement, are as follows: Year 0 1 2 3 4 5 A1 Revenue $200,000 $400,000 $750,000 $1,000,000 $2,000,000 A2 Revenue $500,000 $750,000 $1,000,000 $1,750,000 $2,500,000 a Determine the effects of the three scenarios (Current, A1 and A2) on the five years of cash flows. b If the current forecast has a 40% chance of occurring, and the A1 and A2 scenarios each have a 30% chance of occurring, What is the expected value of the year 5 ending cash flow. c Discuss the implications of the results of parts a and b. Year 0 1 2 3 4 5 Angel Investor $1,000,000 40% ownership Production capability Investment $900,000 Revenue $300,000 $500,000 $1,000,000 $2,000,000 $3,000,000 COGS 40% of Revenue SG&A $180,000 $300,000 $450,000 $600,000 $750,000 Depreciation (MACRS) 5 year 20.00% 32.00% 19.20% 11.52% 11.52% Depreciation $180,000 $288,000 $172,800 $103,680 $103,680 Book Value $900,000 $720,000 $432,000 $259,200 $155,520 $51,840 Accounts Receivable 15% of revenue Accounts Payable 20% of inventory Wages Payable 10% of revenue Inventory 25% of revenue Tax rates 20% Income Statement 0 1 2 3 4 5 Revenue $300,000 $500,000 $1,000,000 $2,000,000 $3,000,000 COGS ($120,000) ($200,000) ($400,000) ($800,000) ($1,200,000) Gross Margin $180,000 $300,000 $600,000 $1,200,000 $1,800,000 SG&A ($180,000) ($300,000) ($450,000) ($600,000) ($750,000) Depreciation ($180,000) ($288,000) ($172,800) ($103,680) ($103,680) EBIT ($180,000) ($288,000) ($22,800) $496,320 $946,320 Pre-tax income ($180,000) ($288,000) ($22,800) $496,320 $946,320 Taxes $36,000 $57,600 $4,560 ($99,264) ($189,264) Net Income ($144,000) ($230,400) ($18,240) $397,056 $757,056 Working Capital 0 1 2 3 4 5 Accounts Receivable $0 $45,000 $75,000 $150,000 $300,000 $450,000 Inventory $0 $75,000 $125,000 $250,000 $500,000 $750,000 Accounts Payable ($0) ($15,000) ($25,000) ($50,000) ($100,000) ($150,000) Wages Payable ($0) ($30,000) ($50,000) ($100,000) ($200,000) ($300,000) Total Working capital $0 $75,000 $125,000 $250,000 $500,000 $750,000 Change in Working Capital $0 $75,000 $50,000 $125,000 $250,000 $250,000 Cash Flow Statement 0 1 2 3 4 5 Operations Activities Net Income ($144,000) ($230,400) ($18,240) $397,056 $757,056 Depreciation $180,000 $288,000 $172,800 $103,680 $103,680 Working Capital change ($0) ($75,000) ($50,000) ($125,000) ($250,000) ($250,000) Total ($0) ($39,000) $7,600 $29,560 $250,736 $610,736 Capital Activities Investment ($900,000) Total ($900,000) Financial Activities Angel Investor $1,000,000 Cash Flow $100,000 ($39,000) $7,600 $29,560 $250,736 $610,736 Beginning Balance $0 $100,000 $61,000 $68,600 $98,160 $348,896 Ending Cash Balance $100,000 $61,000 $68,600 $98,160 $348,896 $959,632 Solution Below are the data block, income statement and cash flow statement from the fro forma example in the Week 8 content. The Angel Investor, that is investing a million dollars, has asked for some further information. Two scenarios are of interest that concern the revenues effect on the ending cash flow amounts during the five years. The two scenarios , in addition to the "Current" one that is in the statement, are as follows: Year 0 1 2 3 4 5 A1 Revenue $200,000 $400,000 $750,000 $1,000,000 $2,000,000 A2 Revenue $500,000 $750,000 $1,000,000 $1,750,000 $2,500,000 a Determine the effects of the three scenarios (Current, A1 and A2) on the five years of cash flows. b If the current forecast has a 40% chance of occurring, and the A1 and A2 scenarios each have a 30% chance of occurring, What is the expected value of the year 5 ending cash flow. c Discuss the implications of the results of parts a and b. Year 0 1 2 3 4 5 Angel Investor $1,000,000 40% ownership Production capability Investment $900,000 Revenue $300,000 $500,000 $1,000,000 $2,000,000 $3,000,000 COGS 40% of Revenue SG&A $180,000 $300,000 $450,000 $600,000 $750,000 Depreciation (MACRS) 5 year 20.00% 32.00% 19.20% 11.52% 11.52% Depreciation $180,000 $288,000 $172,800 $103,680 $103,680 Book Value $900,000 $720,000 $432,000 $259,200 $155,520 $51,840 Accounts Receivable 15% of revenue Accounts Payable 20% of inventory Wages Payable 10% of revenue Inventory 25% of revenue Tax rates 20% Income Statement 0 1 2 3 4 5 Revenue $300,000 $500,000 $1,000,000 $2,000,000 $3,000,000 COGS ($120,000) ($200,000) ($400,000) ($800,000) ($1,200,000) Gross Margin $180,000 $300,000 $600,000 $1,200,000 $1,800,000 SG&A ($180,000) ($300,000) ($450,000) ($600,000) ($750,000) Depreciation ($180,000) ($288,000) ($172,800) ($103,680) ($103,680) EBIT ($180,000) ($288,000) ($22,800) $496,320 $946,320 Pre-tax income ($180,000) ($288,000) ($22,800) $496,320 $946,320 Taxes $36,000 $57,600 $4,560 ($99,264) ($189,264) Net Income ($144,000) ($230,400) ($18,240) $397,056 $757,056 Working Capital 0 1 2 3 4 5 Accounts Receivable $0 $45,000 $75,000 $150,000 $300,000 $450,000 Inventory $0 $75,000 $125,000 $250,000 $500,000 $750,000 Accounts Payable ($0) ($15,000) ($25,000) ($50,000) ($100,000) ($150,000) Wages Payable ($0) ($30,000) ($50,000) ($100,000) ($200,000) ($300,000) Total Working capital $0 $75,000 $125,000 $250,000 $500,000 $750,000 Change in Working Capital $0 $75,000 $50,000 $125,000 $250,000 $250,000 Cash Flow Statement 0 1 2 3 4 5 Operations Activities Net Income ($144,000) ($230,400) ($18,240) $397,056 $757,056 Depreciation $180,000 $288,000 $172,800 $103,680 $103,680 Working Capital change ($0) ($75,000) ($50,000) ($125,000) ($250,000) ($250,000) Total ($0) ($39,000) $7,600 $29,560 $250,736 $610,736 Capital Activities Investment ($900,000) Total ($900,000) Financial Activities Angel Investor $1,000,000 Cash Flow $100,000 ($39,000) $7,600 $29,560 $250,736 $610,736 Beginning Balance $0 $100,000 $61,000 $68,600 $98,160 $348,896 Ending Cash Balance $100,000 $61,000 $68,600 $98,160 $348,896 $959,632 Solution

Explanation / Answer

A1 Revenue

Cash flow statement

A2 Revenue

Cash flow statement

Year 0 1 2 3 4 5 Revenue 200000 400000 750000 1000000 2000000 COGS (80000) (160000) (300000) (400000) (800000) Gross margin 120000 240000 450000 600000 1200000 SG&A 180000 300000 450000 600000 750000 Depreciation 180000 288000 172800 103680 103680 EBIT (240000) (348000) (172800) (103680) 346320 Pre- tax income (240000) (348000) (172800) (103680) 346320 Taxes 48000 69600 34560 20736 (69264) Net income (192000) (278400) (138240) (82944) 277056 Working caital 0 1 2 3 4 5 Accounts Receivable 0 30000 60000 112500 150000 300000 Inventory 0 50000 100000 187500 250000 500000 Accounts Payable 0 (12500) (20000) (37500) (50000) (100000) Wages Payable 0 (20000) (40000) (75000) (100000) (200000) Total Working capital 0 47500 100000 187500 250000 500000 Change in Working Capital 0 47500 52500 87500 62500 250000

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