MGT 325 Module 6 Spreadsheet Exam Part A COMPREHENSIVE CHAPTER 12 & 13 PROBLEMS

Question

MGT 325 Module 6 Spreadsheet Exam

Part A

COMPREHENSIVE CHAPTER 12 & 13 PROBLEMS

MONARCH CORPORATION IS GOING TO START A NEW PRODUCT LINE OF PRODUCTS IN A WHOLE NEW MARKET.

THE DATA FOR ANALYSIS IS PRESENTED BELOW:

COST OF THE EQUIPMENT NEEDED $ 194,000 FIVE YEAR PROPERTY FOR TAX DEPRECIATION

NEW WORKING CAPITAL NEEDS $ 50,000 WILL BE RECOVERED AT THE END OF THE THIRD YEAR

PROJECTED NEW REVENUES:

SALES PROBABILITY

$ 200,000 30%

$ 250,000 50%

$ 300,000 20%

COST OF GOOD SOLD 30% OF SALES

VARIABLE CASH COSTS 10% OF SALES

ANNUAL FIXED CASH COSTS:

RENT $ 50,000

CLEANING $ 20,000

MAINTENANCE & OTHER $ 10,000

TOTAL FIXED COSTS $ 80,000

EQUIPMENT DISPOSAL PROCEEDS $ 19,400 SALVAGE VALUE AT THE END OF YEAR 6

FIRM'S COST OF CAPITAL 12.00%

TAX RATE 35%

NOTE - WHEN COMPUTING TAX, A NET LOSS FOR THE YEAR MEANS A POSITIVE TAX SAVINGS IS CREATED SINCE THERE IS OTHER INCOME TAX ON OTHER INCOME TO OFFSET.

DEPRECIATION RATES FOR TAX PURPOSES:

YEAR ONE 20.00%

YEAR TWO 32.00%

YEAR THREE 19.20%

YEAR FOUR 11.50%

YEAR FIVE 11.50%

YEAR SIX 5.80%

ASSUMPTIONS:

ALL CASH FLOWS IN YEARS 1-6 OCCUR AT THE END OF THE YEAR. ALL INITIAL CASH INFLOWS OR OUTFLOWS OCCUR TODAY.

REQUIRED:

A. ASSUMING SALES ARE $200,000 COMPUTE THE PAYBACK, IRR AND NPV. FOR THE NPV, COMPUTE AT BOTH THE FIRM'S DISCOUNT RATE AND 16%, WHICH IS A 4% PREMIUM ADDED TO THE RATE.

B. COPY THE WHOLE WORKSHEET AND SOLUTIONS FOR PART A TO THE WORKSHEET NAMED PART B,AND REDO THE COMPUTATIONS BY CHANGING THE ANNUAL SALES TO $250,000.

C. COPY THE WHOLE WORKSHEET AND SOLUTIONS FOR PART A TO THE WORKSHEET NAMED PART C, AND REDO THE COMPUTATIONS BY CHANGING THE ANNUAL SALES TO $300,000.

You should place your answers in each of the boxes shown below color-coded in Yellow color.

PART A

YEARS 0 1 2 3 4 5 6

INITIAL INVESTMENT (NO INCOME TAX AFFECTS)

COST OF THE EQUIPMENT NEEDED $

WORKING CAPITAL NEEDS

Explanation / Answer

IRRs Probability X p X-EV (X-EV)^2 p*(X-EV)^2    PART A 4.99% 30% -10.56% 1.12% 0.33%    PART B 17.05% 50% 1.49% 0.02% 0.01%    PART C 27.67% 20% 12.11% 1.47% 0.29% 0.64% Variance EXPECTED VALUE 15.56% STD DEV 8.00% COEFFICIENT =standard deviation/expected value          0.51

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