1. Income Statement Preparation - 25 points
a. Prepare an income statement for Cathy Chen, CPA, for the year ended December 31, 2009 Cathy Chen, CPA
for the Year Ended December 31, 2009|
Sales revenue| | $360,000|
Less: Operating expenses| | |
Salaries| 180,000| |
Employment taxes and benefits| 34,600| |
Supplies| 10,400| |
Travel & entertainment| 17,000| |
Lease payment| 32,400| |
Depreciation expense| 15,600| |
Total operating expense| | 290,000|
Operating profits| | $ 70,000|
Less: Interest expense| | 15,000|
Net profits before taxes| | $ 55,000|
Less: Taxes (30%)| | 16,500|
Net profits after taxes| | $ 38,500|
b. In the first year of practise, Cathy Chen will have met her operating expense of $290K, paid $15K of interest, and after a 30% tax expense, Cathy will have $38 500 net profits after tax, from a Sales Revenue of $360,000.
2. Pro Forma Income Statement – Scenario analysis - 15 points a. See Below Pro Forma Table for Percentage of Sales Statement Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2010| Pessimistic | Most Likely | Optimistic | Sales | $900,000 | $1,125,000 | $1,280,000 |
Less cost of goods sold (45%) | 405,000 | 506,250 | 576,000 | Gross profits | $495,000 | $ 618,750 | $ 704,000 |
Less operating expense (25%) | 225,000 | 281,250 | 320,000 | Operating profits | $270,000 | $ 337,500 | $ 384,000 |
Less interest expense (3.2%) | 28,800 | 36,000 | 40,960 | Net profit before taxes | $241,200 | $ 301,500 | $ 343,040 | Taxes (25%) | 60,300 | 75,375 | 85,760 |
Net profits after taxes | $180,900 | $ 226,125 | $ 257,280 |
b. Percent of Sales is a simple method that accepts all costs to the company is variable and shown as a percentage to sales. However, actually costs are both fixed and variable. The Pessimistic situation shows with a lower level of sales that expenses and costs will be lower based on costs being a percentage of sales.
However, the truth is that some cost will not decrease because those costs are fixed and not variable. When sales are higher in the optimistic and most likely situations, all costs are higher based on the variableness of the expenses. This method or outline results in understating cost in the pessimistic while over stating profits, and opposite in the optimistic situation and most likely.
3. Payback Period - 10 points -
a. Determine the payback period for this project.
Payback period is 6 years. $42000/$7000 = 6
Initial Investment of $42,000
Cash Flow inflows of $7,000
b. Should the company accept the project? Why or why not? The company should accept this project. The payback period is 6 years on this investment, in which the company adheres to maximum policy of 8 years. The company plans to have this project payback $7,000 for ten years, and will stand to make $28,000 after payback in 6 years.
4. NPV – 15 points
Calculate the net present value (NPV) for the following 20 year projects. Comment on the acceptability of each. Assume that the firm has an opportunity cost of 14%. a. Initial investment is $10,000; cash inflows are $2,000 per year NPV = PV – Initial Investment
N = 20, I = 14% , PMT = $2000
PV = $13 246.26
NPV = $13 246.26 - $10,000
NPV = $3,246.26
I would accept this Project based that the NPV is a positive dollar amount.
b. Initial investment is $25,000; cash inflows are $3,000 per year NPV = PV – Initial Investment
N = 20, I = 14% , PMT = $3,000
PV = $19 869.39
NPV = $13 246.26 - $25,000
NPV = ($5,130.61)
I would not accept this Project based that the NPV is a negative dollar amount.
c. Initial investment is $30,000 ;...