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Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of OakStream Farms Co.: OakStream Farms is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Unit sales 4,800 5,100 5,000 5,120 Sales price $22.33 $23.45 $23.85 $24.45 Variable cost per unit $9.45 $10.85 $11.95 $12.00 Fixed operating costs $32,500 $33,450 $34,950 $34,875 This project will require an investment of $20,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project’s four-year life. OakStream pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be under the new tax law. Which of the following most closely approximates what the project’s net present value (NPV) would be under the new tax law? Question Blank 1 of 5 choose your answer... Which of the of the following most closely approximates what the project’s NPV would be when using straight-line depreciation? Question Blank 2 of 5 choose your answer... Using the Question Blank 3 of 5 choose your answer... depreciation method will result in the highest NPV for the project. No other firm would take on this project if OakStream turns it down. Which of the following most closely approximates how much OakStream should reduce the NPV of this project, assuming it is discovered that this project would reduce one of its division’s net after-tax cash flows by $500 for each year of the four-year project? Question Blank 4 of 5 choose your answer... OakStream spent $2,500 on a marketing study to estimate the number of units that it can sell each year. What should OakStream do to take this information into account? Question Blank 5 of 5 choose your answer... 

          Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of OakStream Farms Co.: OakStream Farms is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Unit sales 4,800 5,100 5,000 5,120 Sales price $22.33 $23.45 $23.85 $24.45 Variable cost per unit $9.45 $10.85 $11.95 $12.00 Fixed operating costs $32,500 $33,450 $34,950 $34,875 This project will require an investment of $20,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project’s four-year life. OakStream pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be under the new tax law. Which of the following most closely approximates what the project’s net present value (NPV) would be under the new tax law? Question Blank 1 of 5 choose your answer... Which of the of the following most closely approximates what the project’s NPV would be when using straight-line depreciation? Question Blank 2 of 5 choose your answer... Using the Question Blank 3 of 5 choose your answer... depreciation method will result in the highest NPV for the project. No other firm would take on this project if OakStream turns it down. Which of the following most closely approximates how much OakStream should reduce the NPV of this project, assuming it is discovered that this project would reduce one of its division’s net after-tax cash flows by $500 for each year of the four-year project? Question Blank 4 of 5 choose your answer... OakStream spent $2,500 on a marketing study to estimate the number of units that it can sell each year. What should OakStream do to take this information into account? Question Blank 5 of 5 choose your answer...
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Horngren’s Cost Accounting
Horngren’s Cost Accounting
Srikant M. Datar, Madhav V. Rajan 16th Edition
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Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of OakStream Farms Co.: OakStream Farms is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Unit sales 4,800 5,100 5,000 5,120 Sales price $22.33 $23.45 $23.85 $24.45 Variable cost per unit $9.45 $10.85 $11.95 $12.00 Fixed operating costs $32,500 $33,450 $34,950 $34,875 This project will require an investment of $20,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project’s four-year life. OakStream pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be under the new tax law. Which of the following most closely approximates what the project’s net present value (NPV) would be under the new tax law? Question Blank 1 of 5 choose your answer... Which of the of the following most closely approximates what the project’s NPV would be when using straight-line depreciation? Question Blank 2 of 5 choose your answer... Using the Question Blank 3 of 5 choose your answer... depreciation method will result in the highest NPV for the project. No other firm would take on this project if OakStream turns it down. Which of the following most closely approximates how much OakStream should reduce the NPV of this project, assuming it is discovered that this project would reduce one of its division’s net after-tax cash flows by $500 for each year of the four-year project? Question Blank 4 of 5 choose your answer... OakStream spent $2,500 on a marketing study to estimate the number of units that it can sell each year. What should OakStream do to take this information into account? Question Blank 5 of 5 choose your answer...
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Damon Corporation, a sports equipment manufacturer, has a machine currently in use that was originally purchased 3 years ago for $120,000. The firm depreciates the machine under MACRS using a 5-year recovery period. Once removal and cleanup costs are taken into consideration, the expected net selling price for the present machine will be $70,000. Damon can buy a new machine for a net price of $160,000 (including installation costs of $15,000). The proposed machine will be depreciated under MACRS using a 5-year recovery period. If the firm acquires the new machine, its working capital needs will change: Accounts receivable will increase $15,000, inventory will increase $19,000, and accounts payable will increase $16,000. Earnings before depreciation, interest, and taxes (EBIT) for the present machine are expected to be $95,000 for each of the successive 5 years. For the proposed machine, the expected EBIT for each of the next 5 years are $105,000, $110,000, $120,000, $120,000, and $120,000, respectively. The corporate tax rate (T) for the firm is 40%. Damon expects to be able to liquidate the proposed machine at the end of its 5-year usable life for $24,000 (after paying removal and cleanup costs). The present machine is expected to net $8,000 upon liquidation at the end of the same period. Damon expects to recover its net working capital investment upon termination of the project. The firm has a 40 percent corporate tax rate and a 10 percent required return. Create a spreadsheet to answer the following: a. Create a spreadsheet to calculate the initial investment. b. Create a spreadsheet to prepare a depreciation schedule for both the proposed and the present machine. Both machines are depreciated under MACRS using a 5-year recovery period. Remember that the present machine has only 3 years of depreciation remaining. c. Create a spreadsheet to calculate the operating cash flows for Damon Corporation for both the proposed and the present machine. d. Create a spreadsheet to calculate the terminal cash flow associated with the project. e. Determine the payback period of the project. f. Determine the profitability index of the project. g. Determine the IRR of the project. h. Determine the NPV of the project. i. Provide the recommendation based on your analysis on those criteria.

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A 5-year project will require an investment of $100 million. This comprises of plant and machinery worth $80 million and a net working capital of $20 million. The entire outlay will be incurred at the project’s commencement. Financing for the project has been arranged as follows: 80,000 new common shares are issued, the market price of which is $500 per share. These shares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9% per year for an indefinite tenure. Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having a face value of $1,000. These bonds now have a market value of $1,150 each. At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the net working capital will be liquidated at its book value. The project is expected to increase revenues of the firm by $120 million per year. Expenses, other than depreciation, interest and tax, will amount to $80 million per year. The firm is subject to a tax rate of 30% Plant and machinery will be depreciated at the rate of 25% per year as per the written-downvalue method. You are required to: 1. Compute the cost of equity for this project 2. Compute the relevant cost of debt for this project. 3. Compute the WACC 4. Determine the initial cash flow for the project. 5. Determine the earnings before taxes for years 1 through 5 6. Compute the OCF for years 1 through 5 7. Compute the Terminal cash flow. 8. Compute the FCF for years 1 through 5 9. Compute the project’s NPV and IRR 10. Should the project be accepted or rejected?

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Company ABC is one of the leading firms in the food industry. As the CEO, you are considering a new product line. A series of meetings have been scheduled with the relevant managers for this project. In the first meeting, Sophia, the head of marketing team, provides the following basic information on the project. The initial investment is £9 million. It will last for 3 years and the equipment will be depreciated in a straight line over the project. The salvage value of the equipment will be zero at the end of the project. The cost per unit of the new product is £5 and the sale price is £10. Each year ABC can sell 1 million units. The tax rate of ABC is 20% and the cost of capital is 10%. REQUIRED: Please calculate the NPV of this project given the information provided by Sophia. [6 marks] In the second meeting, you received an update on the net working capital (NWC) of this project, which was missed in the first meeting. Specifically, cash for this project will be 10% of revenue each year, inventory will be 5% of revenue, accounts receivable will be 20% of revenue, and accounts payable will be 5% of revenue. The NWC will be released at the end of the project. Please calculate the NWC in the end of each year and its annual changes. [7 marks] In the third meeting, you are informed that the information on depreciation should be updated. The straight-line depreciation rule is still applied but the book value of the equipment at the end of the project should be £3 million. In addition, the equipment can be sold at a price of £4 million at the end of project. Please calculate the after-tax cash flow from the asset sale. Furthermore, please update your NPV calculation based on all related information. [8 marks] Latest information shows that the price of production materials for the project may increase in the near future. Accordingly, you have a concern about the sensitivity of your NPV (in Part iii) to costs. Please calculate the elasticity of NPV to the costs. [9 marks]

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Transcript

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00:01 Hello students, here is a question.
00:02 Diamond corporation as a sports equipment of manufacturer as a machines currently used in an original purchases.
00:09 So, we have the for some informations given in the question based on that let we calculate the initial investment.
00:16 So, to calculate the initial investment here is a format for this initial investment.
00:29 So, the format is for five years, we need to calculate this for six years, 1, 2, 3, 5 and 6 years.
00:41 So, our first item will be cost of equipment.
00:54 So, cost of equipment will be 120 ,000 dollars.
01:00 So, then 5 years micr recovery rate recovery rate which is 20 percent, 32 percent, 19 .20 percent, 11 .52 percent and again 11 .52 percent and 5 .76 percent and then next is annual depreciation.
01:44 So, annual depreciation will be 24 ,000 dollars, 38 ,400 dollars and 23 ,040 dollars and then 13 ,824 dollars, 824 dollars and the fifth year it is 13 ,824 dollars and sixth year is 6 ,912 dollars and the next is accumulated depreciation.
02:27 So, accumulated depreciations are 24 ,000 dollars for the first year and 62 ,400 dollars then 85 ,440, 99 ,264 and 113 ,088, 120 ,000 dollars for sixth year.
02:59 So, next is book value at the end of an year.
03:04 So, that is to be calculated 120 ,000 minus c, 120 ,000 minus c.
03:14 So, that will be 96 ,000 dollars, 57 ,600 dollars, 34 ,560 dollars, 20 ,736 dollar and 6 ,912 dollars and last is 0 dollars.
03:32 So, next is sale price of old equipment, sale price of old equipment.
03:43 So, that is 34 ,560 dollars.
03:47 So, book value of old equipment.
03:59 So, next is sale price of old equipment...
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