12. THE FINAL PROBLEM IS A CALCULATION PROBLEM with multiple parts Frozen Turkey
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Question
12. THE FINAL PROBLEM IS A CALCULATION PROBLEM with multiple parts
Frozen Turkeys Scenario
Cost of Land $ 210,000
Cost of Buildings & Equipment $ 325,000
MACRS Class 20
Life of Project (Years) 5
Terminal Value of Land $ 315,000
Terminal Value of Buildings & Equipment $ 170,000
First year sales (pounds) 250,000
Price per Pound $3.40
Unit Sales Growth Rate 7.5%
Variable Costs as % of Sales 65%
Fixed Costs 72,000
Tax Rate 33%
WACC 10.5%
a. Prepare a statement of annual cash flows for years 0 through 5. Cash flows in year 0 are your expenses for building and land.
Sales growth is based on the annual growth rate in units.
Assume no changes in fixed or variable costs.
Depreciate the project cost for 5 years, with the cash flow in year 5 to include the terminal cash flow of ending the investment.
b. Calculate the NPV,
c. profitability index,
d. IRR,
e. MIRR,
f. payback and
g. discounted payback of the cash flows
h Using scenario manager find best case, worst case, base case of NPV based on sales in pounds, price per pound, and variable cost percent. Make sure to include scenario summary.
Explanation / Answer
b. Calculate the NPV
NPV = - Year 0 Cash Flow + year 1 cash flow/(1+r) + year 2 cash flow/(1+r)^2 + year 3 cash flow/(1+r)^3 + year 4 cash flow/(1+r)^4 + year 5 cash flow/(1+r)^5
NPV = -535000 + 155106.88/1.105 + 173776.75/1.105^2 + 189266.04/1.105^3 + 206005.66/1.105^4 + 728552.22/1.105^5
NPV = $ 468,371.70
C)
Profitability index = 1 + NPV/Initial investment
Profitability index = 1 + 468371.70/535000
Profitability index = 1.88
d)
At IRR, NPV = 0
NPV = - Year 0 Cash Flow + year 1 cash flow/(1+r) + year 2 cash flow/(1+r)^2 + year 3 cash flow/(1+r)^3 + year 4 cash flow/(1+r)^4 + year 5 cash flow/(1+r)^5
0 = -535000 + 155106.88/(1+r) + 173776.75/(1+r)^2 + 189266.04/(1+r)^3 + 206005.66/(1+r)^4 + 728552.22/(1+r)^5
By solving above equation we get
IRR = 33.10%
d)
MIRR = (FV of cash inflow/Pv of cash outflow)^(1/n) - 1
FV of cash inflow = 155106.88*1.105^4 + 173776.75*1.105^3 + 189266.04*1.105^2 + 206005.66*1.105^1 + 728552.22
FV of cash inflow = $ 1,653,001.47
Pv of cash outflow = 535000
MIRR = (1653001.47/535000)^(1/5) -1
MIRR = 25.31%
f)
Payback period = 3 + 16850.34/206005.66
Payback period = 3.08 Years
g)
Discounted Payback period = 3 + 112034.60/138175.18
Discounted Payback period = 3.81 Years
Working Year 0 Year1 Year2 Year3 Year4 Year5 Sales [a ] 850,000.00 913,750.00 982,281.25 1,055,952.34 1,135,148.77 Variable Costs as % of Sales [b] 65% 65% 65% 65% 65% Variable Costs [c = a*b] 552,500.00 593,937.50 638,482.81 686,369.02 737,846.70 Fixed Costs [d] 72000 72000 72000 72000 72000 Accelerated Depreciation Rate [e] 3.750% 7.219% 6.677% 6.177% 5.713% Annual Depreciation [f= e*325000] 12,187.50 23,461.75 21,700.25 20,075.25 18,567.25 Net Income before tax [g = a-c-d-f] 213,312.50 224,350.75 250,098.19 277,508.07 306,734.82 Tax Expenses [h = 33%*g] 70,393.13 74,035.75 82,532.40 91,577.66 101,222.49 Net Income after tax [i=g-h] 142,919.38 150,315.00 167,565.79 185,930.41 205,512.33 Cost of Land [j] -210000 Cost of Buildings & Equipment [k] -325000 Terminal Value of Land [l] 315,000.00 Terminal Value of Buildings & Equipment [m] 170,000.00 Accumulated Depreciation [n = sum of f] 95,992.00 Book value of Machine [o = Cost - accumulated depreciation] 229,008.00 Loss on sale of Building [p = m--o] (59,008.00) Tax saving on loss on sale of building [q = p*tax rate] 19472.64 Post tax on terminal value of building [r] 189,472.64 Annual Cash Flow [s =i+f+j+k+l+r] (535,000.00) 155,106.88 173,776.75 189,266.04 206,005.66 728,552.22Related Questions
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