Business, Financial Markets and Services
Year 4
Superior Manufacturing is thinking of launching a new product. The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter
Superior Manufacturing is thinking of launching a new product. The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 55% of sales. Indirect incremental costs are estimated at $80,000 a year. The project requires a new plant that will cost a total of $1,000,000, which will be depreciated straight line over the next five years. The new line will also require an additional net investment in inventory and receivables in the amount of $200,000. Assume there is no need for additional investment in building and land for the project. The firm's marginal tax rate is 35%, and its cost of capital is 10%. Based on this information you are to complete the following tasks.

Prepare a statement showing the incremental cash flows for this project over an 8-year period.

Calculate the Payback Period (P/B) and the NPV for the project.

Based on your answer for question 2, do you think the project should be accepted? Why? Assume Superior has a P/B (payback) policy of not accepting projects with life of over three years.

If the project required additional investment in land and building, how would this affect your decision? Explain.

A resource on financial functions in Excel is available in the Labs area. Click "Labs," then "Student Success Learning Lab." Click "Presentation Material" in the left navigation bar. Choose "Financial Functions" to download the file. When asked, be sure to click "Save," rather than "Open."

To receive full credit on this assignment, please show all work, including formulae and calculations used to arrive at financial values. Submit your work to your instructor via the drop box....

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1. A company needs to elect 10 directors. A shareholder owns 80 shares. What is the maximum number of votes that he or she can cast for a favorite candidate under (10 points)
a. Straight voting? 80
b. Cumulative voting? 80*10 = 800
2. “If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio by throwing darts at the Wall Street Journal.” Explain why this is not so. (10 points) This strategy does not consider risk.
3. The NuPress Valet Company has an improved version of its hotel stand. The investment cost is expected to be 72 million dollars and will return 13.50 million dollars for 5 years in net cashflows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the cost of debt is 9%, and the tax rate is 34%. What is the NPV of the project? (10 points)
WACC = .5*13+.5*9*(1-.34) = 9.47%
PMT = 13,500,000, i=9.47%, n=5, PV = ?; NPV = PV – 72,000,000 = -20,123,870.16
4. TXI Corporation is a holding company with four main subsidiaries. The percentage of its business coming from each of the subsidiaries, and their respective betas, are as follows: (10 points)
Subsidiary
Percentage of Business
Beta
Electric Utility
60%
0.70
Cable Company
25%
0.90
Real Estate
10%
1.30
International Projects
5%
1.50
a. What is the holding company’s beta?
Β = .6*.7+.25*.9+.10*1.3 + .05*1.5 = 0.85
b. Assume that the risk-free rate is 6 percent and the market risk premium is 5 percent. What...

...CHAPTER 26 NAME 10-MINUTE QUIZ A SECTION
#___________________
Indicate the best answer for each question in the space provided. 1 Which of the following is not a capital budgeting decision? a Whether to acquire a subsidiary company. b Whether to expand a product line. c Whether to fill a special order. d Whether to purchase a fleet of trucks. 2 Which of the following is an example of a nonfinancial consideration in capital budgeting? a Will an investment generate adequatecashflows to promptly recover its cost? b Will an investment generate an acceptable rate of return? c Will an investment have a positive net present value? d Will an investment have an adverse effect on the environment? 3 Which of the following is not considered when using the payback period to evaluate an investment? a The profitability of the investment over its entire life. b The annual net cashflow of the investment. c The cost of the investment. d The expected life of the investment. Use the following data for questions 4 and 5. Stone Mfg. is considering expanding operations by investing $300,000 in equipment. The equipment has a useful life of eight years, with no salvage value. Straight-line depreciation is used. Stone predicts that net income will increase $37,500 per year as a result of this strategy. 4 Refer to the above data. The payback period for this investment is: a 8 years. b 4 years. c Over 13 years. d 2.5 years. 5 Refer to...

...Projecting CashFlow
Projecting cashflow is a vital aspect of managing a business. Cashflow covers expenses, which is why start-ups often seek financing or loans--to provide a base of capital to fund the business while waiting for cashflow. Here is how to project your cashflow.
Estimating the incrementalcashflow requires from the investment itself, acquiring and disposing of the investment’s assets and the cashflows from the operating the investment. Those affected by the revenues, expenditures, depreciation and taxes. The bottom line of the cashflow is that a set of net cashflow for each period associated with investment decision.
After estimating cashflow which arises from an investment opportunity, the techniques apply to this cashflow to assess the attractiveness of the opportunity. The techniques produce a result in terms of the length of time to pay back the investment (the payback period and the discounted payback period) the value added (net present value) the benefit cost ratio ( the profitability index) or the return (the internal rate of return and modified internal rate of return).
The evaluate cash...

...6%
15.0%
Solution: B
r = 4% + 1.2 x (12% - 4%) = 13.6% and
$24.50 = $1.50 / (13.6% - g)
Leads to g = 7.48%
2. What is the yield to maturity on a 10-year zero-coupon bond with a $1,000 face value
selling at $742?
A)
B)
C)
D)
E)
3.03%
7.42%
13.48%
34.78
42.37%
Solution: A
YTM = (1000/742) 1/10 -1 = .03029 or 3.03%
3. Consider the following monthly cashflows (see the diagram below):
X
Today
Z
X
Z
X
Z
1
2
3
4
19
20
Cashflows of an amount X are made for months 1, 3, 5, …, 17 and 19 (the ten oddnumbered months) and cashflows of an amount Z are made for months 2, 4, 6, …, 18
and 20 (the ten even-numbered months). The APR is 6% and is compounded on a
monthly basis. What is the present value of these cashflows today if X = $2,000 and
Z = - $700?
A) 12,311
B) 12,406
C) 25,569
D) 25,664
E) 32,955
Solution: B
The monthly interest rate is 0.5% but since the X’s cashflows are made every two
months, we need to calculate the 2-months equivalent interest rate:
I2m = r = (1 + 0.5%) 2 − 1 = 1.0025%
The present value of the Z’s cashflows is given by:
Using your calculator:
I2m = 1.0025%, n=10, PMT = -700, FV=0, COMP PV
PVz0 = -$6629.02 at t=0 (Since fist payment begins at t=2 and “i" is calculated for every
2 month period, and last...

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Write Up: Mini Case ofChapter 10: The Basics of Capital Budgeting: Evaluation CashFlows
Oct 2, 2014
Executive Summary:
We heritage $1 million from our grandfather, and we just received our master degree in MBA, and because we love to be our own boss and, we don not have the skills to trade on the market, we decided to purchase an established franchise in the fast-food area to make some investments. We chose two franchises: L, Lisa’s Soups, Salads, & Stuff which serves breakfast and lunch; and S, Sam’s Fabulous Fried Chicken that serves dinner. We think these two franchises are perfect complement to each other, also we estimate that both projects has the same risk characteristics, and for that we required 10% for our return, but we do not have the ability to stay on the project for more than 3 years, for that reason we estimate the free cashflows for both projects for the next three years. The main problem here that we have to evaluate and determine whether one or both of the franchises should be accepted.
To solve this problem, we used 6 capital budgeting techniques: net present value (NPV), internal rate of return (IRR), modified IRR (MIRR), profitability index (PI), payback and discounted payback. Each approach provides a different piece of information, so it is better to look at all of them when evaluating projects. Each one of them has it’s own strengths and weaknesses, which may help us to understand...

...The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.
现金流入的现值和现金流出的现值之间的差额。 NPV是用在资本预算分析的投资或项目的盈利能力。
The net present value of a project is the present value of current and future benefit minus the present value of current and future costs.
一个项目的净现值是当前和未来的收益减去当前和未来成本的现值的现值。
Payback Period allows investors to assess the risk of an investment attributable to the length of its investment life.
Easy to calculate and understand.
Limitations
Basic payback period ignores the time value of money. This limitation can be overcome by applying the discounted payback period.
Payback period does not take into account the level of cashflows of an investment after the payback period. In other words, payback period ignores the overall profitability of investments.
Basic payback period can be difficult to calculate where multiple negative cashflows are incurred during the investment period. This problem can be solved by calculating the modified payback period as discussed above.
Payback period does not provide a theoretically absolute decision rule like other appraisal methods (e.g. all investments with positive NPV should be accepted) and is therefore susceptible to subjective interpretation.
Explanation
Payback Period is the duration needed to recover the cost of...

...Analyze company cashflows
East Coast Yachts has a strong operating cashflow highlighted by strong earnings before interest and taxes of $88,416,000. With the addition of $20,160,000 in depreciation and subtraction of $30,921,000 in taxes, they managed an operating cashflow of $77,654,400. East Coast Yachts appears to be in or approaching a growth mode with their capital spending on fixed assets increasing by $60,000,000 during the fiscal year. However, they made the wise move of reducing the effect of this expenditure with the sale of $6,786,000 of fixed assets already on the books. Further growth is evidenced by the positive net working capital cashflow of $4,670,560, a sign of a growing company. East Coast Yachts is making effective use of their assets; this is demonstrated by their total cashflow generated by assets coming to $19,769,840 during the fiscal year. A positive sign in their cashflow to creditors is their $33,912,000 in debt service, which included the retirement of $22,800,000 in debt. It appears that they covered the cost of their debt service with the proceeds from the sale of long-term debt producing $40,000,000. East Coast Yachts had a large cashflow to stockholders at $53,550,960. They minimized the amount of cash paid to...

...Statement of CashFlows
STATEMENT OF CASHFLOWS 1
The Statement of CashFlows is a very viable and helpful resource. Decision makers use the Statement of CashFlows in many instances to assess the viability of a firm. Within the statement are many types of elements that are incorporated to create the complete Statement of CashFlows. Also within the statement is what is known as the inflows and outflows. In some cases, activity notes may be incorporated to help complete such representations.
To fully understand the Statement of CashFlows one must know the definition of it and what it in fact means. The Statement of CashFlows is a change statement summarizing the transactions that caused cash to change during the period (Spiceland, 2007). In know this it is easier to understand why the Statement of CashFlows and its purpose is to provide information about the cash receipts and cash disbursements of an enterprise that occurred during a period. Thus the statement will provide valuable information about the operating, investing, and financing activities that occurred during the period as well. Below is an example of a Statement of cashflows:...