If the Coat Fits, Wear It

1. Using the historical data as a guide, construct a pro forma (forecasted) profit and loss statement

* First, we calculate the Net Operating Profit after Tax, which is equals to EBIT×1-t.

Free cash flows of the project for next five years can be calculated by adding depreciation values and subtracting changes in working capital from net income. In 2010, there will be a cash outflow of $2.2 million as capital expenditure. In 2011, there will be an additional one time cash outflow of $300,000 as an advertising expense. Using net free cash flow values for next five years and discount rate for discounting, NPV for the project comes out to be $2907, 100. The rate of return at which net present value becomes zero i.e.

NPV analysis uses future cash flows to estimate the value that a project could add to a firm’s shareholders. A company director or shareholders can be clearly provided the present value of a long-term project by this approach. By estimating a project’s NPV, we can see whether the project is profitable. Despite NPV analysis is only based on financial aspects and it ignore non-financial information such as brand loyalty, brand goodwill and other intangible assets, NPV analysis is still the most popular way evaluate a project by companies.

2. What is the company 's rate of net income growth in 2004,2005, and 2006? Is projected net income growing faster or slower than projected sales? After computing these values, take a hard look at the 2004 income statement data to see if you want to make any adjustments.

The rise in revenue was rapid starting from the year of operations. The key period of business was from April to September were revenues were equal to 65% of total revenue as the product was seasonal. The basis of forecasting for the year 1981 & 1982 is the expectations of sales by Mr. Turner & Mr. Rose. It is given that total sales were $ 15.80 million in first half of year 1981 and the total sales in 1981 to reach $ 30 million. Profit after tax was expected to be $ 1 million for 1st half and we assumed for the next half, profit will be in proportion to first half & expected to be amounting to $ 0.90 million. For year 1982, the sales expectation by Mr. Rose was around more than $ 71 million &

1. Please assess the economic benefits of acquiring the Vulcan Mold-Maker machine. What is the initial outlay? What are the benefits over time? What is an appropriate discount rate? Does the net present value(NPV) warrant the investment in the machine?

When making a purchase to improve on many areas of operations there are always factors to take into consideration. There will be a great amount of capital expenditure for this equipment; however the potential for higher return on investment is remarkable. The initial cost of purchasing the MAGNETOM is approximately $ 1 million. There will be an additional cost of $500,000 to operate and maintain the machine. These costs will be reimbursed within the first eight months of extensive utilization if the all marketing for the machine is on point. Since we are currently paying a technician to operate our out of date machinery, there is no reason why this prediction cannot become reality. There will also be an offset of income inherited by the lack of errors made by the technicians after they have trained for the new machine . ("Magnetom espree -," 2013)

Use the following information for questions 13-16. You are looking at purchasing a widget producing machine that will cost $11 million which will be salvageable in 9 years for $3 million. The machine will increase revenues by $7.5 million per year and will fall into the 30% CCA bracket. You can lease the machine for $2.75 million per year. Your pre-tax cost of debt is 8.5%. Your corporate tax rate is 35%.

Due to the technological advances in the medical industry, the clinic has decided on advanced medical equipment to provide quality care to the patients. The equipment that will be purchased is a High- Speed CT Scanner, X-Ray Machine, and an Ultrasound Machine. This equipment will allow more quick and efficient test and treatment. The options that can be made include: buying new or refurbished equipment with an option of a loan, acquiring on capital or operating lease. During this phase, I chose the most cost effective option to acquire the equipment. To acquire the equipment, I chose the operating lease. Since there are always potential advances in technology, buying the equipment may not be a good idea. In the long term, the equipment that was purchased will likely be replaced by newer technology in a few years. Due to the decisions of acquiring new equipment, the clinic is now doing well and the profits are growing which allowed growth for the clinic.

The revenue is $600,600*1.2= $720,720. The variable cost changes as sales increases and fixed cost stays the same, the gross profit is $175,500. After tax, the net income is $100,557.

Estimated machinery life: 3 years (after which there will be zero value for the equipment and no further cost savings)

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

The main difference between investing in the Zinser machine and maintaining the status quo is an initial investment of $8.25 million and the receipt of $608,000 in after-tax sales proceeds from selling the existing machine. Additionally, there is an initial $50,000 ($32,000 after-tax) cost for training employees, but this cost is only incurred once (see exhibit 3). In their first year using the Zinser machine there will be a 5% decrease in sales volume, but selling price will increase 10%. Material costs per pound will be the same as the status quo, but conversion costs will decrease to $0.4077 per pound per year due to lower power, maintenance and return costs. Days of inventory held will also drop to about 20 days. All other assumptions are the same as the status quo. In this scenario, the NPV of the Hunter Plant is about $15.87million if Aurora invests in the new Zisner machine (see exhibit 3).

Your supervisor, Vic Gonzales, has asked you to prepare a capital budgeting report indicating whether ISGC should replace the existing machine or not. Indicate how would you proceed (without making any calculations)?