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Q: Help with Finance Study Questions (Need it by 10PM Tuesday) ( Answered 5 out of 5 stars,   0 Comments )
Subject: Help with Finance Study Questions (Need it by 10PM Tuesday)
Category: Business and Money > Finance
Asked by: asciiletter-ga
List Price: $20.00
Posted: 06 Nov 2006 15:46 PST
Expires: 06 Dec 2006 15:46 PST
Question ID: 780634
I have two pages in my finance practice sheet for an upcoming exam
that I am unsure how to do.  I would like detailed answers before 10PM
tommorow(Tuesday).  If I get the answers after that point I will not
have enough time to study.  So this is a time sensitive request.  I
scanned the questions and put them online at:

Subject: Re: Help with Finance Study Questions (Need it by 10PM Tuesday)
Answered By: omnivorous-ga on 07 Nov 2006 07:46 PST
Rated:5 out of 5 stars
asciiletter ?

12.	How much cash does Hamstand see after the sale?  It grosses
$60,000 but has to pay taxes on the gain.  The equipment is now only
valued at $14,000 ? so the taxes are paid on a $46,000 gain:

Taxes = .30 * $46,000 = $13,800

NET CASH IN to Hamstand: $60,000 - $13,800 = $46,200

Questions 13-17:  For these we?ll need to go to a spreadsheet, which
I?ve linked here.  It should be viewable in any browser and you can
download the Excel spreadsheet for changes or analysis:

Best Company: grinder project evaluation

In the spreadsheet, cash outflows are in red and cash inflows are in black.

13.	We list the upfront expenses as ?Year 0? numbers, as you?ll note
from the column head.  Initial investment here includes the increased
working capital called for by the difference in Current Assets vs.
Current Liabilities.  Cash will be reduced by a portion of the cost of
increased receivables ? but $58,000 of the increase is being funded
via accounts payable.  (Note that some might place this cost in year 1
? but it really has to be funded upfront).

The other sale and tax payment cash flows should be obvious in B4-B13.
 The net investment is $62,920.

14.	It may be tempting to run P&Ls or cash flow statements for each
grinder.  But as this question indicates, it?s really easier just to
run the CHANGES in P&L and cash flow.

Depreciation is listed in year 6 only as a reminder that when you sell
the machine at the end of year 5, you?re only recapturing $23,500 of
depreciation ? so only that portion of the sale price is taxable. 
There are no taxes or cash flow in year 6, as the machine has been

For this question, it is necessary to run depreciation schedules on
both machines so that you can tell what the new, higher ?incremental
depreciation? is.  Note that we do not put depreciation in red because
it?s not a real cash expense.

It is also important to note that when taxes are red (negative)
they?re coming back as cash.

All year 1 expenses are calculated as if they occur at the end of the
year.  That?s a standard assumption in finance questions.

Your cash inflows are on line 32.

15.	Terminal cash flow includes accounting for the unique end-of-project costs:
?	proceeds of the sale ($29,000)
?	subtracting taxes on the gain (.40 * $23,500) = -$9,400
?	adding back the working capital that now goes to cash = $12,000

Terminal cash flow is $31,600.

16.	The timeline includes B13 and all of line 32:

Year 0: -$62,920
Year 1: $12,480
Year 2: $25,440
Year 3: $17,000
Year 4: $18,880
Year 5: $54,880

17.	The discounted cash flow is shown on line 36 and the NPV is
$29,194 or the sum of line 36.

Finance theory says that this project is a ?go? with a positive NPV. 
But it in the real world is not as attractive as it appears in this
analysis and might have a hard time getting funded with a tough
finance staff.  A tough finance staff would ask: ?How certain are
these numbers??  The weakest one in a capital investment analysis is
almost always the salvage value.  Not just is it five years from now,
making a sale price difficult to estimate, but technology may have
changed and made the tooling worthless.  Or your manufacturing staff
may cut maintenance in the final year and you find the tool in
substandard condition.

The finance staff may insist on reducing the salvage value to zero ?
or even putting a charge in for removal of the equipment.  As you can
tell, reducing the year 5 cash flow by about $20,000 (net of taxes)
seriously reduces the NPV.

18.	Back to a spreadsheet and I?ve created a new one for these calculations:

Before even starting, questions 18-20 are almost certainly set up to
give you an understanding of how the three techniques for project
analysis ? IRR, NPV and payback period ? yield different answers.

For this question you can see that Project B has the largest
discounted cash flow at $1,497.  This is the project that would get
the greenlight.

19.	For payback period, you?re looking at how long it takes to payback
a project using simple (not discounted) cash flows.  Payback period is
defined as:

Payback period = Cost of project / cash inflows 

Here, a smaller number is better and Project B wins again.

?Payback Period? (undated)

20.	The IRR is the project discount rate that reduces NPV to zero. 
The largest IRR is the best project, in this case Project S because it
achieves a 14.7% IRR.

Odellion Research
Internal Rate of Return (undated)

If any aspect of these calculations is confusing, please don?t
hesitate to ask for a clarification before rating this Google Answer.

Best regards,

asciiletter-ga rated this answer:5 out of 5 stars
Exactly the type of answer I needed.  The spreadsheets really helped
put it into perspective.  Thanks

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