Assignment:
This data given below applies to the first six questions:
The president of Indigo 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:
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MACRS class (depreciation):
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3-year (33%, 45%, 15%, 7%)
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Economic Life:
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4 years
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Price:
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$300,000
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Freight and Installation:
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$30,000
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Salvage Value:
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$60,000
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Effect on NWC :
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Increase by $10,000
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Revenues:
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$300,000/year
(100,000 units at $3.00/unit)
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Costs excluding depreciation:
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$150,000/year
(Fixed Cost $50,000; VC = $1.00/unit)
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Year 1 Depreciation
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$108,900.00
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Year 2 Depreciation
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$148,500.00
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Year 3 Depreciation
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$49,500.00
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Year 4 Depreciation
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$23,100.00
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Sale Price of Building
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$60,000.00
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Tax rate:
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40%
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Cost of capital
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10%
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The Project Cash Flow Table below is provided to assist in calculating the relevant after-tax cash flows, and then answer the questions concerning investment cost, cash flows, and net present value.
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Year
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0 1
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2
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3
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4
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Total Revenues
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Operating Costs (exc. dep)
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Depreciation
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Earnings before taxes
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Taxes
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Net income
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Depreciation
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Net operating cash flows
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Equipment Cost
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Installation
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Change in Net Working Capital
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Opportunity Cost of Project
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Salvage Value
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Tax on Salvage Value
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Return of NWC
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NET CASH FLOWS
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Question 1) What is the net investment required at t = 0?
Question 2) What is the operating cash flow in Year 1?
Question 3) What is the operating cash flow in Year 2?
Question 4) What is the operating cash flow in Year 3?
Question 5) What is the project's NPV?
Question 6) After seeing your analysis, the president has asked 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)
A) Breakeven analysis
B) Sensitivity analysis
C) Scenario analysis
Question 7) 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:
A) Breakeven analysis
B) Sensitivity analysis
C) Scenario analysis
Question 8) 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:
A) Breakeven analysis
B) Sensitivity analysis
C) Scenario analysis
Question 9) Finally, 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
A) Breakeven analysis
B) Sensitivity analysis
C) Scenario analysis
D) An unnecessary exercise that will be completely ignored by the capital budgeting committee
Question 10) What is the final cash flow in year 4?