Question 1:-
The new-product department of Telephone Accessories, Inc. (TAI) has researched a new multipurpose charging station. Further development (depreciable) to have it ready to sell is estimated at $2,000,000. The salvage value at the end of the time horizon is estimated at $600,000. A vendor has been found in Viet Nam with a purchase price of $74.00 each. Purchasing, shipping, distribution, etc. would add $10.00 per unit.
Marketing has estimated that it could be sold at a price of $99 and that 50,000 units could be sold in the first year, 250,000 in the second year, 350,000 in the third year, and 500,000 in the 4th year. The marketing budget for this new product would be $4,000,000 in year 1 and $2,000,000 in the remaining years.
Inventory , starting in year 1, is estimated at 20% of revenue, and accounts payable is expected to be 25% of the cost of goods sold in each year. Since this is a new product, both of these would be zero in year 0. Other working capital items are to be ignored.
Use a MARR of 20%. income and capital gains tax rate of 18%, a time horizon of 4 years and straight line depreciation? Is this product financially feasible for the above financial estimates?
Question 2:-
Gadgets, Inc. is considering two alternative new products. Only one will be offered.
Product ABC would require an upfront investment of $60,000 that is not eligible for depreciation and has a zero salvage value. It is forecasted to have revenue of $500,000 in year 1 that would increase by $25,000 annually after year 1. Cost-of-goods-sold would be 60% of revenue. It would require $180,000 annually for SG&A expenses. Working capital requirements can be ignored.
Product XYZ would require an upfront investment of $750,000 that is not eligible for depreciation and has a zero salvage value. Annual revenues are forecasted to be $1,000,000 in year 1 and to increase by 20% each year after year 1. Cost-of-goods-sold would be 50% of revenue. It would require $400,000 annually for SG&A expenses. Working capital requirements can be ignored.
Gadgets, Inc., uses the IRR criterion and a 5-year time horizon for all proposals, which to be accepted must exceed their MARR of 15%. Determine which product should be offered from a financial perspective and state why.
Question 3:-
Monroe Technical Products, Inc.(MTP) has a retail store that sells all kinds of consumer technical products. Business is good and MTP is considering to add a second store on the other side of their city.
The existing store expects annual sales revenue of $3 million in the current year with its COGS being 70% of this. If a new store is not opened, it is expected that sales revenue will increase at about 5% in year 1, 5% more in year 2, and 5% more in year 3. The SG&A is $200,00 annually and expected to stay at this level in all years.
An additional store on the other side of the city has been proposed that is forecasted to have sales of $1 million in year 1, and to increase 50% in year 2 and 50% more in year 3. However, this is expected to cause the existing store's sales to remain at the present amount of $3 million in all years. The new store would require an upfront investment of $300,000 that is not depreciable and would have zero salvage value. The SG&A for the new store is expected to be $250,000 in year 1, 225,000 in year 2, and $200,000 in year 3.
For evaluating this proposal, MTP has decided to use a MARR of 12%, an income tax rate of 20%, a capital gains tax rate of 15%, and a three-year time horizon . Working capital can be ignored.
From a financial perspective, should the new store be opened? State why.
Question 4:-
Modern Medical Mechanics (MMM) uses a production machine that incurs annual maintenance costs of $50,000 annually (includes labor, materials and downtime). It has been proposed to buy a new machine instead of incurring this annual maintenance expense. The present machine is fully depreciated and maintenance expenditures do not affect its zero book value. If a new machine is purchased, the old machine would be sold in year 1 for $10,000. If the old machine is retained, its salvage value will be $5,000 in year 5.
An alternative to the high annual maintenance cost is to purchase a new machine for $175,000, which includes all shipping and installation expense. The $175,000 cost would be depreciated using 5-year MACRS. The estimated salvage value of this new machine would be $40,000 that would be received in year 5. The new machine is expected to require maintenance costs of $3,000 annually.
The choice of alternative will not affect revenues and costs of good sold.
Modern Medical Mechanics uses an Income tax rate of 20%, a capital gains tax rate of 15%, and a MARR of 10%. A 5-year time horizon is to be used in the evaluation.
Make a recommendation of which alternative should be adopted from a financial perspective and state why.
Question 5:-
USA Manufacturing (USAM), has been unsuccessfully trying to get their finished inventory distribution to work effectively as Amazon and others who give next or same day shipping from their automated warehouses. Without this revenues are expected to stagnate at the present level. It has been proposed to move this function to Amazon's warehouse division that would assume all finished inventory functions and some accounts receivable functions. Therefore USAM is considering outsourcing their finished goods inventory management to Amazon. The benefits are 1) increased sales , and 2) a reduction in working capital.
If the same or next day shipping is attained, revenues for their products are expected to be grow $500,000 in year 1 and annually increase $300,000 hereafter (e.g. increase $500,000 in year-1, increase $300,000 to be $800,000 in year-2, increase $300,000 to be $1,100,000 in year 3, and increase $300,000 to be $1.4 million in year 4). COGS is expected to remain at 80% of revenues since the reduction in internal warehouse and personnel cost would be approximately equal to the fees paid to Amazon.
Presently (year 0), USAM has $2,000,000 of finished inventory, $1,000,000 of accounts receivable and $500,000 of wages payable. The outsourcing will enable finished inventory to be only product waiting to be shipped to Amazon and is expected to be a constant $250,000 annually in all future years. Accounts receivable is expected to be reduced to $750,000 in all future years. Wages Payable is expected to be reduced to $450,000 in future years. All other working capital items are not expected to change much and should be ignored.
It is expected the that proposal will require an upfront investment of $250,000 to plan and execute the change. This upfront investment will not be depreciated and it will not change the ending asset value of the product or company at the end of the time horizon. The transfer would be accomplished in year 0 with full operation starting in year 1. No change in SG&A is expected.
USAM uses a MARR of 15%, income tax rate of 25%, capital gain tax rate of 10% and a time horizon for this type of proposal of four years. .
a. Determine if the product is financially justified using the Present Worth Criterion. (the IRR function does not work well with this data without trying many guesses. So ignore it.)
b. Would the proposal be justified if the benefits were only the working capital reductions?
Question 6:-
The A-Plus pharmaceutical company has completed the scientific work on a new product. The investment needed for development of this completed research into a marketable product is being proposed. The proposals financial analysis is shown below.
The is a new initiative product and the sales quantity estimate is highly subjective. Determine the sensitivity of the present worth and IRR to the annual quantity sold. Assume the quantity sold would be constant for the four years. Select values for the quantity sold that would illustrate potential risk to the success of this proposal. In a sentence, summarize your results.
Question 7:-
Runner Sports Clothing (RSP) presently sells shirts and shorts designed for the avid runner. They are considering a proposal to add sweatshirts to their product line. The financial documents for this evaluation are below.
Several estimates in the data are debatable. Therefore, a survey was distributed, collected and summarized as shown in the table below. If the current estimate is viewed as 50% likely and the other two estimates are considered 25% likely, What is the expected value of the present worth of this proposal. In a sentence, summarize the results.
Question 8:-
The nonprofit foundation, "Beat the Bug", has $1,500,000 in funds to award to organizations working on preventive efforts of mosquito carried diseases. They have received proposals that are listed below.
A two part process will be used to choose from among these. First the B/C criterion will be used to determine which proposals are to be considered further. In this step, the initial startup costs, benefits, dis-benefits and operating costs should be considered.
Then the final selection will use the present worth (MARR = 10%) of the initial startup and operating cost. The combination of proposals that achieve the largest Benefit while the sum of the present worth's are within the available funds will be selected.
Using this two-step process, determine which proposals will be funded. Unused funds are not to be considered.
Question 9:-
The nonprofit foundation, "Beat the Bug", also has $20,000,000 in funds to award to organizations that are treating people who have contracted mosquito carried diseases. They have the following proposals. For each there is data from the past year on the cost for the year and the number of patients that were treated. Also included in the data is the maximum number of patients that an organization can treat in the upcoming year.
a. Rank order the proposals using the C/E criterion
b. Within available funds, how much should each organization be awarded to maximize the number of patients treated.
Question 10:-
A CEO is very skeptical of the positive financial results of a proposal analysis. What types of things could be done to perhaps relieve the CEO's anxiety? Answer below or in a separate MS Word document. Limit the response to 500 words.
Attachment:- Question 1-10-Answer-Exam.rar