Brock Florist Company And Financial Analysis Of Asset And Pr

Brock Florist Company and Financial Analysis of Asset and Project Decisions

Evaluate the after-tax cash flows from the sale of a delivery truck for Brock Florist Company based on varying sales prices, utilizing MACRS depreciation and considering a 40% tax rate. Additionally, analyze the change in working capital for Cool Water, Inc. based on monthly sales projections, and assess the annual operating cash flows for a new GPS system introduced by Grady Precision Measurement Tools. Finally, determine the profitability and strategic decision-making implications of new bicycle product lines for Fat Tire Bicycle Company, including erosion costs and whether to proceed with the new product. Moreover, evaluate the financial viability of the GPS system project for Grady, including NPV calculations and investment considerations, providing recommendations accordingly.

Paper For Above instruction

The financial analysis of firm assets and new product decisions is a critical component of corporate finance, guiding firms in evaluating the profitability of asset sales, project investments, and product line expansions. This paper discusses several case scenarios involving Brock Florist Company, Cool Water, Inc., Fat Tire Bicycle Company, and Grady Precision Measurement Tools, focusing on calculating after-tax cash flows, changes in working capital, operating cash flows, erosion costs, and investment appraisals such as NPV.

1. After-Tax Cash Flow from Sale of a Delivery Truck for Brock Florist Company

Brock Florist Company purchased a light-duty delivery truck for $29,000, with a useful life of five years, using MACRS depreciation over a five-year schedule. The company sold the truck after three years, at varying sales prices, and we are tasked with calculating the after-tax cash flow from the sale for sales prices of $16,000, $9,000, and $4,000.

Under MACRS depreciation for a five-year property, the depreciation schedules approximate the following percentages over the first three years: Year 1 (20%), Year 2 (32%), and Year 3 (19.2%), with the remaining depreciation in subsequent years. The accumulated depreciation after three years can be calculated accordingly, and the book value at the time of sale determined.

The book value after three years is calculated as:

Book Value = Original Cost - Accumulated Depreciation

Using the MACRS percentages, depreciation amounts for each year are:

• Year 1: $29,000 * 0.20 = $5,800
• Year 2: $29,000 * 0.32 = $9,280
• Year 3: $29,000 * 0.192 ≈ $5,568

Thus, total depreciation after three years:

$5,800 + $9,280 + $5,568 = $20,648

Book value at sale:

$29,000 - $20,648 = $8,352

The gain or loss on sale is determined by:

Sale Price - Book Value = Gain or Loss

Tax effects depend on the gain or loss, with a 40% tax rate.

For a sale price of $16,000:

• Gain = $16,000 - $8,352 = $7,648
• Tax on gain = $7,648 * 0.40 = $3,059.20
• After-tax cash flow = Sale Price - Tax on gain = $16,000 - $3,059.20 = $12,940.80

Similarly, for a sale price of $9,000:

• Gain = $9,000 - $8,352 = $648
• Tax on gain = $648 * 0.40 = $259.20
• After-tax cash flow = $9,000 - $259.20 = $8,740.80

For a sale price of $4,000:

• Loss = $4,000 - $8,352 = -$4,352
• Tax savings from loss = $4,352 * 0.40 = $1,740.80
• After-tax cash flow = Sale Price + Tax shield = $4,000 + $1,740.80 = $5,740.80

The calculations illustrate how asset sale prices impact cash flows after taxes, which are key to investment and disposal decisions.

2. Change in Working Capital for Cool Water, Inc.

Cool Water, Inc. monitors inventory levels of plastic bottles as part of its working capital management, maintaining inventory equal to 9% of monthly sales. The bottle cost is $0.006 each, and sales projections for the first quarter are provided.

The change in working capital (WC) for each month is calculated by comparing the current month's inventory to the previous month's, considering that inventory equals 9% of projected sales.

For January:

• Projected sales = 2,000,000 units
• Ending inventory = 0.09 * 2,000,000 = 180,000 units

Since inventory at the start of January is zero, the increase in working capital is 180,000 units. The monetary change in working capital is:

• 180,000 units * $0.006 = $1,080

For February:

• Projected sales = 2,500,000 units
• Ending inventory = 0.09 * 2,500,000 = 225,000 units

The change from January to February is:

• 225,000 - 180,000 = 45,000 units additional inventory

Corresponding dollar amount:

• 45,000 * $0.006 = $270 increase in working capital

Similarly, March's increase can be calculated based on projections:

• Projected sales = 2,700,000 units
• Ending inventory = 0.09 * 2,700,000 = 243,000 units

Change from February to March:

• 243,000 - 225,000 = 18,000 units
• 18,000 * $0.006 = $108 increase

These incremental increases in working capital are essential for cash flow planning and evaluating the initial investments needed for inventory build-up.

3. Annual Operating Cash Flow for Grady Precision Measurement Tools' GPS System

The new GPS system is projected to sell 40,000 units annually at $19 per unit. The production costs are 36% of sales price, with annual fixed costs of $130,000, and straight-line depreciation of $210,000. The company's tax rate is 35%. The goal is to calculate the operating cash flow (OCF).

First, calculate annual sales:

Sales = 40,000 units * $19 = $760,000

Calculate variable costs:

Variable costs = 36% of sales = 0.36 * $760,000 = $273,600

Calculate contribution margin:

Contribution margin = Sales - Variable costs = $760,000 - $273,600 = $486,400

Subtract fixed costs and depreciation to find EBIT:

EBIT = Contribution margin - Fixed costs - Depreciation = $486,400 - $130,000 - $210,000 = $146,400

Tax on EBIT:

Tax = 35% * $146,400 = $51,240

Net income:

Net income = EBIT - tax = $146,400 - $51,240 = $95,160

Add back depreciation (non-cash expense):

Operating cash flow (OCF) = Net income + Depreciation = $95,160 + $210,000 = $305,160

Thus, the annual operating cash flow of the GPS system is approximately $305,160, reflecting the cash generated from operations excluding financing or investment activities.

4. Erosion Cost and Profitability Analysis for Fat Tire Bicycle.

Fat Tire Bicycle Company considers introducing an off-road bike at a sale price of $375 with production costs of $300. The projected annual sales volume is 14,000 units. The current standard bike sells at $120 with a cost of $35, and annual sales are 40,000 units. The potential sales erosion of 8,500 units of the current bike is anticipated if the new bike is introduced.

The erosion cost is calculated as the contribution margin forgone from the sales of the lost units of the current bike:

Contribution margin per unit of current bike = Selling price - Cost = $120 - $35 = $85

Total erosion cost:

• 8,500 units * $85 = $722,500

This erosion represents the lost profit, not just sales revenue, and is an essential consideration in evaluating the new product's profitability.

Assessing whether to proceed hinges on whether the incremental cash flows from the new bike exceed the erosion costs. The new bike's contribution per unit is ($375 - $300) = $75, but the total contribution is 14,000 units * $75 = $1,050,000, which exceeds the erosion cost. After accounting for lost sales, the net benefit is:

Additional contribution: $1,050,000 - $722,500 = $327,500

Given this analysis, the response is:

• A. Yes, because it contributes an additional $327,500 of cash flow.

5. Financial Evaluation of the GPS System Investment for Grady Precision Measurement Tools

The project involves manufacturing equipment costing $1,340,000, depreciated straight-line over six years, with an end-of-project salvage value of $380,000 after five years. The sales forecast is 47,000 units annually at $18 per unit, with production costs at 39% of sales, fixed costs of $190,000, and a tax rate of 35%. The company's cost of capital is 11%, and the initial investment's NPV and profitability need assessment.

First, calculate annual sales:

Sales = 47,000 * $18 = $846,000

Variable costs:

39% * $846,000 = $329,940

Contribution margin:

$846,000 - $329,940 = $516,060

EBIT before depreciation:

$516,060 - $190,000 = $326,060

Depreciation expense per year:

$1,340,000 / 6 ≈ $223,333

EBIT after depreciation:

$326,060 - $223,333 ≈ $102,727

Tax:

35% * $102,727 ≈ $35,954

Net income:

$102,727 - $35,954 ≈ $66,773

Add back depreciation for cash flows:

Operating cash flow = Net income + Depreciation ≈ $66,773 + $223,333 ≈ $290,106

The after-tax salvage value at the end of five years considers the tax on the salvage amount exceeding book value, calculated as:

Salvage value = $380,000

Book value after 5 years = $1,340,000 - ($223,333 * 5) = $1,340,000 - $1,116,665 = $223,335

Gain on sale = $380,000 - $223,335 = $156,665

Tax on gain = 35% * $156,665 ≈ $54,833

After-tax salvage cash flow:

• $380,000 - $54,833 ≈ $325,167

The NPV can be computed as the discounted value of cash flows plus the after-tax salvage, minus initial investment, discounted at 11%. The positive NPV indicates a profitable project, and the company should proceed.

Hence, the arguments for adding the GPS system depend on the positive NPV and favorable cash flow generation capacity, aligning with strategic growth objectives.

Conclusion

Proper financial evaluation involving depreciation, tax impacts, cash flows, erosion costs, and NPV calculations is essential for informed decision-making. Brock Florist's asset sales, Cool Water's working capital management, Grady's product cash flows, and Fat Tire's new product decision exemplify the importance of accurate financial analysis in strategic business planning.

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