Fin 431 Practice Problem

The fixed cost is assumed that Larry has discovered the other fixed cost incurred. The total investment is $800,000. The worst case scenario assumes that Larry got a total line of credit from the bank in the amount of $400,000 and invested $400,000 from other source. The Notes payable – short term and the long-term debt is (11.8 + 3.7) = 15.5 % from Table F in the handout. The Loan interest and payment per year is ($400,000 * 0.155)= $62,000. The Income data from Table F indicates that there is a 0.4% of all other expenses net out of the total sales which equals to $109,908 (5,700,666 gallons * $4.82 *0.4%) .

Using the tables (shown below and in Exhibit 1) to calculate cash flow before financing and net proceeds from sale, a DCF method was used to arrive at a NPV of $216,789 and IRR of 13.3% for a 5-year holding period at assumed vacancy of 5% (Exhibit 1). As mentioned earlier, this IRR exceeds the 12.5% initially set out, and therefore seems like a feasible project. Using a higher vacancy rate of 7%, however, lowers the IRR to a point that is no longer feasible. If holding all else same, a vacancy of 7% on the building yields a NPV of $122,420 and an IRR of 11.47% (please see table below and Exhibit 2). This IRR does not meet the minimum required and therefore the assumption of vacancy rates staying at 5% is paramount to our analysis. This aspect of the analysis is considerably risky as an assumed vacancy rate does not necessarily yield a guaranteed rate. If vacancy happens to rise, then the valuation of the property is far different than what was originally envisioned.

Problem 1: Jonathon Barrs is a manager for Easy Manufacturing, LLC. He wishes to evaluate three possible investments. These investments are for the purchase of new machine tools from Germany, Japan, and a local US manufacturer. The firm earns 10% on its investments and they have a risk index of 5%. The chart below lays out the expected return and expected risks of the three projects.

9. What is the Cost of Debt, before and after taxes? Using the interest rate for the largest debt…cannot use the weighted interest rate for the debt since it includes capital lease obligations with no stated rate and could not find in the notes to the financials. 5.4% After tax cost is .054 x (1-.36) = 3.5%

Agro-Chem, Inc. is a regional producer of agricultural chemicals based in Houston Texas that needs help making a lease versus purchase decision. By understanding the material presented, we will be able to come to a decision. However, after reviewing the information presented, there are a few problems that need to be investigated before finalizing our recommendation. Agro-Chem, Inc. chose to go with the financial manager’s idea of using a discount rate of 14% (average risk) to figure out the present value costs of leasing and purchasing even though the assistant treasure suggested a 12% (low risk) discount rate. Agro-Chem, Inc. brought in the company’s CPA to help settle the debate

Table 7 in the detailed analysis above shows the summary of the Discounted Cash Flow analysis performed for each of the four potential properties considered for investment. From the chart below, we observe that of the four properties, TFB has the maximum increase in reversion value at the end of the holding period, i.e. 10years. On a primarily income generation potential basis, Alison Green, with a Net Present value of the future rents at $734.29 looks attractive among the four options. Looking at the Investment ranks of the four properties with Simple returns and Discounted returns variables, Alison

Commercial Capital Corporation is the leasing subsidiary of a major regional bank and offers a lease at 12.75 million per year for 4 years. The first payment is due upon delivery and installation. The rest of the payments are due each subsequent year at the beginning of the year. This cost includes the same service contract as what would have been obtained with purchase.

Tire City, Inc. is a rapidly growing retail distributor of automotive tires. Although they have 10 shops located throughout the Northeast region, the bulk of TCI’s inventory is managed at a central warehouse. During the last three years, sales have been growing at a compound annual rate in excess of 20%. With such a great reflection of their excellent service and customer satisfaction in their net income, TCI’s central warehouse is “bulging at the seams”. TCI has decided to expand its warehouse facilities to accommodate future growth, and has requested a five year loan. We, MidBank, previously financed a project for TCI in 1991, which is currently being repaid in equal annual installments. TCI plans to

A2: Jack should recognize the $1.2 million as rental expense along with all the other lease payments ratably over the 10 years (lease term of the new agreement). It should initially be accounted for as prepaid lease payments and then be recognized as lease expense over the next 10 years as par. 840-10-35-4 states, “If at any time the lessee and lessor agree to change the provisions of the lease, other than by renewing the lease or extending its term, in a manner that would have resulted in a different classification of the lease under the lease classification criteria in paragraphs 840-10-25-1 and 840-10-25-42 had the changed terms been in effect at lease classification inception, the revised agreement shall be considered as a new agreement over its term, and the criteria in paragraphs 840-1025-1 and 840-10-25-42 shall be applied for purposes of classifying the new lease. Likewise, except when a guarantee or penalty is rendered inoperative as described in paragraphs 840-30-35-8 and 840-30-35-23, any action that extends the lease beyond the expiration of the existing lease term, such as the exercise of a lease renewal option other than those already included in the lease term, shall be considered as a new agreement, which shall be classified according to the guidance in section 840-10-25. Changes in estimates (for example, changes in estimates of the economic life or of

Chris Miller has been given an opportunity to take over an established dental clinic. The benefits of taking over this clinic is that he already has loyal customers and that there is only three clinics in the city. Miller has some major decisions that he needs to think about before he takes over this practice. He needs to decide how he will finance this purchase and how will he get the bank to give him a loan? Before we can even decide if he should go ahead with the purchase, we need to analyze three different scenarios of what can happen to the practice. We also need to make sure that Miller would be able to repay the loans as we are analyzing the different scenarios.

ML had developed a policy of selling manual machines and renting automatic machines. Manual machines did not cost much, did not require service, and could be modified to attach different fasteners inexpensively. Automatic machines were rented on an annual basis because they would have been more expensive to sell and it provided annual income to ML. However, about 700 of the rented machines were returned each year. During the time that machines were in inventory, ML would modify the machines to attach different fasteners. This was expensive with an average cost per modification of $2000. If all 700 machines were modified during a given year this would have cost $1.4 million per year. It was also industry practice to provide preventative maintenance and

AMG Inc, a Fortune 500 financial services company, is implementing 7,542 new PCs in the time frame of twelve months in multiple locations covering eight states. This is a $7.5 million technology financing decision which needs to be investigated. The current decision that Adam Stolz, controller for the CFO, faces is whether AMG should lease or buy the new PCs. Also, he is under pressure from the CEO to keep the transaction off of the balance sheet, in which case the equipment/software would have to be defined as an operating lease, according to the standards defined in FAS 13. The lease options consist of a 24-month lease or a 36-month lease, and AMG could also choose to purchase the computers for the same

The bank lends amount $Y to ABC for the purchase of Lexington. The bank loan is repaid in 20 equal, year-end, payments. However, the bank insists that the lease payments must be 110% of the annual repayments of the bank loan. Note that the equal bank loan repayments include interest and principal.

I have included the firm's original income statement and balance sheet without the purchase and then with the machine purchase. I have assumed that the firm would use the $218,000 to reduce the bank loans balance for each year. This reduction of the bank loan balance will lower their three restrictive financial ratios.

The question of building up adequate level of capital and resources in public sector banks did not receive enough attention in the past. The Government ownership of the