This data applies to the first six questions: The president of Real Time Inc. ha
ID: 2632352 • Letter: T
Question
This data applies to the first six questions:
The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new asset. The asset would require the use of an extra building that the firm is not presently using, but could be sold in the real estate market for $60,000. An analysis of the project showed the following data:
MACRS class (depreciation):
3-year (33%, 45%, 15%, 7%)
Economic Life:
4 years
Price:
$300,000
Freight and Installation:
$30,000
Salvage Value:
$60,000
Effect on NWC :
Increase by $10,000
Revenues:
$300,000/year (100,000 units at $3.00/unit)
Costs excluding depreciation:
$150,000/year
(Fixed Cost $50,000; VC = $1.00/unit)
Year 1 Depreciation
$108,900.00
Year 2 Depreciation
$148,500.00
Year 3 Depreciation
$49,500.00
Year 4 Depreciation
$23,100.00
Sale Price of Building
$60,000.00
Tax rate:
40%
Cost of capital
10%
The Project Cash Flow Table below is provided to assist you in calculating the relevant after-tax cash flows, and then answer the questions concerning investment cost, cash flows, and net present value.
Year
0
1
2
3
4
Total Revenues
Operating Costs (exc. dep)
Depreciation
Earnings before taxes
Taxes
Net income
Depreciation
Net operating cash flows
Equipment Cost
Installation
Change in Net Working Capital
Opportunity Cost of Project
Salvage Value
Tax on Salvage Value
Return of NWC
NET CASH FLOWS
Question 5
What is the final cash flow in year 4.
$195,240
$265,240
$205,240
$225,240
4 points
Question 6
What is the project's NPV?
$56,580
$60,740
$67,570
$77,580
$127,570
4 points
Question 7
After seeing your analysis, the president asked you to recalculate the NPV if the sales volume is only 80,000 units per year instead of 100,000. This is an example of (or a component of)
Breakeven analysis
Sensitivity analysis
Scenario analysis
Extreme insensitivity to the amount of work you put into evaluating the project
2 points
Question 8
After you reevaluated the project based on the lower sales volume, the president asked you to reevaluate the project again, this time considering a lower and higher sales price, a higher and lower variable cost, a higher and lower fixed cost, and a lower and higher salvage value, showing the difference in NPV for the change in each variable. This exercise is an example of
Breakeven analysis
Sensitivity analysis
Scenario analysis
A complete waste of time
2 points
Question 9
Impressed by your analysis of how each assumption affects NPV, the boss then asks you to recalculate NPV based on the worst case sales volume, worst case variable cost, and worst case sales price representing an overall downturn in market demand combined with inflationary input markets. In response to this request, you will perform
Breakeven analysis
Sensitivity analysis
Scenario analysis
A task unworthy of a professional financial manager with your talents and skills
2 points
Question 10
Finally, after you have taken blood pressure medication to deal with the stress of excessive demands and lack of recognition of your many valuable contributions, your boss asks you to calculate, based on the expected values for the sales price and fixed and variable costs, the sales volume required for the net income from the project to cover the cost of the investment. She has requested that you perform
Breakeven analysis
Sensitivity analysis
Scenario analysis
One more unnecessary exercise in futility that will be completely ignored by the capital budgeting committee regardless of the amount of time it takes you to complete the analysis.
2 points
Question 11
A recurring financial theme from Scripture that was repeated in many of the devotions during the semester was:
we should tithe at least 10% of our income.
wealth oftn indicates a materialistic attitude.
debt should be undertaken only after careful consideration.
we should view ourselves as managers rather than owners of our economic resources.
MACRS class (depreciation):
3-year (33%, 45%, 15%, 7%)
Economic Life:
4 years
Price:
$300,000
Freight and Installation:
$30,000
Salvage Value:
$60,000
Effect on NWC :
Increase by $10,000
Revenues:
$300,000/year (100,000 units at $3.00/unit)
Costs excluding depreciation:
$150,000/year
(Fixed Cost $50,000; VC = $1.00/unit)
Year 1 Depreciation
$108,900.00
Year 2 Depreciation
$148,500.00
Year 3 Depreciation
$49,500.00
Year 4 Depreciation
$23,100.00
Sale Price of Building
$60,000.00
Tax rate:
40%
Cost of capital
10%
Explanation / Answer
8. Sensitivity analysis
9. Senario analysis
10. Breakeven analysis
11. we should view ourselves as managers rather than owners of our economic resources
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