AC Project 4 Calculations**
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School
University of Maryland Global Campus (UMGC) *
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Course
630
Subject
Finance
Date
Apr 3, 2024
Type
xlsx
Pages
16
Uploaded by ayindecole97
Instructions
Answer all questions in this workbook. Be sure to read the introductory text on tabs 1 and 3 as well as these instructions.
Keep in mind that the focus of this project is corporate finance
. The information generated by the accounting system is important; but in finance, decisions are driven by an analysis of cash flows
rather than profits.
Tab 1
contains a series of exercises on the concept of the time value of money. These exercises do not relate directly to the issues facing LGI.
Tab 2
focuses on the concept of annuities
. The first few questions do not pertain specifically to LGI; the latter questions do.
Tab 3
pertains to whether LGI should acquire new assets that may enhance the company's productivity and thus improve financial performance.
031422
1. Briefly explain the meaning of the term "present value" in your own words.
Present value refers to the current value at the present moment.
2. Briefly explain the meaning of the term "future value" in your own words.
Future value signifies the value that is expected to exist at a later point in time.
3. What is the future value in five years of $1,500 invested at an interest rate of 4.95%?
PV
$1,500
NPER
5 years
$1,909.87 RATE
4.95%
4. What is the future value of a single payment with the following characteristics?
PV
$950
NPER
6 years
RATE
5.4%
$1,302.47 5. What is the present value of $65,000 in six years, if the relevant interest rate is 8.1%?
NPER
6 years
RATE
8.10%
$40,734.20 FV
$65,000
6. What is the present value of a single payment with the following characteristics?
Time value of money (TVM) exercises
There are five variables in TVM calculations: present value, number of periods, rate of return, regular payments, and future value. If four of the variables are known, then the fifth can be calculated using algebra, a financial calculator, or a computer program such as Excel.
Excel functions for the five variables are as follows:
PV—present value NPER—number of periods RATE—rate of return
PMT—regular payments
FV—future value
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NPER
11 years
RATE
5.05%
FV
$10,000
$5,816.25 7. The present value of a payment is $4000. The future value of that payment in five years will be $48
PV
$4,000 NPER
5 years
3.71%
FV
$4,800 8. What is the annual rate of return of a single payment with the following characteristics?
PV
$1,000
NPER
15 years
FV
$10,000
16.59%
011022
800. What is the annual rate of return?
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1. How many years would be required to pay off a loan with the following characteristics?
PV
$11,500
RATE
10.6%
14.24
PMT
$1,600 (annual payments)
2. What is the annual payment required to pay off a loan with the following characteristics?
PV
$14,700
RATE
10.0%
$2,387.22 NPER
10 years
3. Why is FV not part of the calculations for either question 1 or question 2?
4. At what annual rate of interest is a loan with the following characteristics?
NPER
17 years
PMT
$100,000
PV
$1,000,000
6.66%
For questions 5-8, LGI's cost of capital is
8.11%
5. LGI projects the following after-tax cash flows from operations from
its aging Bowie, Maryland distribution facility (which first went on line in 1953)
over the next five years. What is the PV of these cash flows?
Projected after-tax cash flows
Year
(in $ millions)
1
(40)
($37.00)
2
(40)
($34.22)
3
(40)
($31.66)
4
(40)
($29.28)
5
(40)
($27.09)
The future value is not relevant in these inquiries since they do not concentrate on determining the ultimate payment or future value. As a result, the future value is unnecessary for calculating the number of years or payment amount.
Tab 2 - Annuities
($159.25)
6. LGI extended the analysis out for an additional 7 years, and generated the
following projections. What is the PV of these cash flows?
Projected after-tax cash flows
Year
(in $ millions)
1
(40)
($37.00)
2
(40)
($34.22)
3
(40)
($31.66)
4
(40)
($29.28)
5
(40)
($27.09)
6
(40)
($25.05)
7
(40)
($23.17)
8
(40)
($21.44)
9
(40)
($19.83)
10
(40)
($18.34)
11
(40)
($16.96)
12
(40)
($15.69)
($299.73)
7. The CFO asked you to undertake a more detailed analysis of the plant's costs, noting that while
it is convenient for making calculations when projections result in data that can be treated like an annuit
this does not always represent the most accurate estimate of future results. What is the PV of these cash
Projected after-tax cash flows
Year
(in $ millions)
1
(40)
($37.00)
2
(50)
($42.78)
3
(55)
($43.53)
4
(60)
($43.92)
5
(70)
($47.40)
($214.63)
8. As part of a larger plan to sell off underperforming assets, LGI is considering selling the Bowie propert
and using other existing facilities more efficiently. LGI received four preliminary offers from potential buy
property. What is the PV of each offer? PV of each offer (in $ Offer A
$102.17 million, paid today
102.17
Offer B
$19.85 million per year, to be paid over the next 8 years
$113.60 Offer C
$201.88 million, to be paid in year 8
$108.18 Offer D
$18.09 million per year, to be paid over the next 7 years and $122.26 a $53.05 million payment in year 8
9. From a profit maximizing point of view, which offer should LGI accept?
10. Define the term annuity in your own words. How might the concept of an annuity impact the proces
capital budgeting and new asset acquisition?
LGI should accept offer D since the highest present value at $122.26 million
An annuity is a predetermined payment amount that is transferred from one entity to another over a period of time. When it comes to capital budgeting, annuities are utilized to evaluate the financial viab
company's project that involves assets. Additionally, when considering the acquisition of new assets, a
play a crucial role in determining the affordability and financial consequences associated with various options.
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011022
ty,
h flows?
ty yers for the Bowie
millions)
ss of specified bility of a annuities financing
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Table 1 - Data
Cost of the new manfactoring equipment
$
191.1
Corporate income tax rate - Federal
26.0%
Corporate income tax rate - State of Maryland
8.0%
Discount rate for the project 5.98%
Table 2 - After-tax Cash Flow Timeline
(all figures in $ millions)
Year
0
1
850.0 840.0 23.89 (13.89)
2
900.0 810.0 23.89 66.11 3
990.0 870.0 23.89 96.11 4
1,005.0 900.0 23.89 81.11 5
1,200.0 1,100.0 23.89 76.11 6
1,300.0 1,150.0 23.89 126.11 7
1,350.0 1,300.0 23.89 26.11 8
1,320.0 1,300.0 23.89 (3.89)
Table 3 - Example - Computin
For Year 4
(all figures in $ millions)
Projected Cash Inflows from Operations
1005.0 minus
Projected Cash Outflows from Operation
(900.0)
Projected Cash Inflows from Operations
Projected Cash Outflows from Operations
Depreciation Expense
Projected Taxable Income
Robotics-based equipment proposal
If the Bowie plant is sold, those operations will need to shift to the main Largo facility. The
sorting and distribution equipment to facilitate more cost-effective operations (and be abl
The CFO has asked you to evaluate the cash flow projections associated with the equipme
the purchase should go forward. Table 2 shows projections of the cash inflows and outflow
using the new equipment.
Keep the following in mind:
Depreciation. The equipment will be depreciated using the straight-line method over eigh
Taxes. The CFO estimates that company operations as a whole will be profitable on an ong
this specific project will provide a tax benefit in the year of the loss.
minus
Depreciation Expense
(23.9)
equals
Projected Taxable Income
81.1 Projected Taxable Income
81.1 times
Corporate income tax rate - Federal
26.0%
equals
Projected Federal Income Taxes
21.1 Projected Taxable Income
81.1 times
Corporate income tax rate - State
8.0%
equals
Projected State Income Taxes
6.5 1. Complete Table 2. Compute the projected after tax cash flows for each of years 1-8.
2. Compute the total present value (PV) of the projected after tax cash flows for years 1-8.
3. Compute the net present value (NPV) of the projected after tax cash flows for years 0-8.
4. Compute the internal rate of return (IRR) of the project.
5. The CFO believes that it is possible that the next few years will bring a very low interest Therefore, she has asked that you repeat the NPV calculation in question 3 showing the cas
discount rate for the project is
5.02%
million
(191.1)
(3.61)
(1.11)
14.72 17.19 5.29 67.52 24.99 7.69 87.32 21.09 6.49 77.42 19.79 6.09 74.12 32.79 10.09 107.12 6.79 2.09 41.12 (1.01)
(0.31)
21.32 ng Projected After-tax Cash Flows
Projected Cash Inflows from Operations
1005.0 minus
Projected Cash Outflows from Operations
(900.0)
Projected Federal Income Taxes
Projected State Income Taxes
Projected After-tax Cash Flows e CEO is proposing to acquire robotics-based le to handle the increased workload) at Largo. ent purchase proposal and recommend whether ws that would occur during the first eight years ht years. The projected salvage value is $0.
going basis. As a result, any accounting loss on
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minus
Projected Federal Income Taxes
(21.1)
equals
Projected State Income Taxes
(6.5)
Projected After-tax Cash Flows 77.4 490.67 .
$380.56 .
$189.46 25.84%
rate environment.
$395.73 se where the $204.63
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