XYZ Company has sales of $4,800,000, COGS is 40% of sales, operating expenses ar

Question

XYZ Company has sales of $4,800,000, COGS is 40% of sales, operating expenses are $2,100,000, interest expense $20,000 and depreciation 30,000. Tax rate 40%. XYZ is now evaluating the purchase of a new machine for $210,000 installed with no NWC change. They plan to sell the machine at the end of 3 years for $40,000. MACRS 3 year depreciation. With the more efficient machine, labor savings per year are expected to be $70,000, $94,000 and $76,000 respectively. 40% tax. The cost of capital for this project is 8.2%

1. They expect to increase sales by 8% next year. Complete a proforma income statement with COGS and operating expenses increasing at the 8%, interest expense stays the same and depreciation expense increases by $40,000 (new machine purchase decision). What is their EAT, earnings after tax?

475,440

463,440

451,440

438,000

2. XYZ has current assets of $680,000 fixed assets of $5,400,000, and$240,000 in AP and accruals. They are presently at 90% of capactiy. What can sales reach before they need to add fixed assets?

5,333,333

5,280,000

4,320,000

6,800,000

3. True or False: They have a need for external funds (AFN)?

Please show work.

Explanation / Answer

1. Proforma Income Statement

$ Sales 5184000 Less: COGS 40% of sales 2073600 3110400 Less: Operating expenses 43.75% of sales 2268000 Operating income 842400 Less: Depreciation 70000 Less: Interest Expense 20000 Net income before tax 752400 Less: Tax 300960 Net income after tax 451440

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