Gradestman 625 Final Exam Summer 2014 Questions

Gradestman 625 Final Exam Summer 2014 questions

Perform financial analysis and prepare a three-year income statement for Awesome Gadget, INC based on past data and forecasted changes in sales price, costs, and quantities. The income statement should follow standard accounting sequence and format, including revenues, COGS, fixed costs, depreciation, taxes, and totals for years 1-3.

Determine which of three investment proposals maximizes company value using IRR, given initial investments, annual cash flows, salvage values, and a 15% MARR over 6 years. Identify the proposal with the highest IRR.

Calculate depreciation for an $5 million investment over 8 years using MACRS, find its book value after 8 years, and determine the capital gain or loss upon sale at year 8, considering a 10% capital gains tax rate.

Prepare a cash flow statement and evaluate the present worth of a proposed marketing program, considering revenues, costs, taxes, working capital, and using a 10% MARR over 3 years to determine if the project is financially justified.

Analyze a $500,000 annual R&D expenditure proposal that would be funded by a 3% price increase, resulting in an initial 10% sales revenue loss, and subsequent annual growth in revenue. Use a 5-year horizon and assess the project’s viability.

Evaluate whether launching a new "Not-so-smart" phone model at a $20 million investment is financially justified over 3 years, considering reduced sales, increased S.G.&A., depreciation, and no change in working capital, at a 15% MARR. Determine the project's net present value and profitability.

Compare two machine replacement options over a 6-year span, considering purchase costs, salvage values, operating costs, and MACRS depreciation. Use a 13% MARR to evaluate which machine replacement is more financially advantageous.

Calculate the investment amount needed to achieve a specified MARR based on a projected cash flow and income statement, and analyze how increasing the product’s price to $37.99 affects the present worth and sales, using a 15% MARR.

Assess three different scenarios for a new product launch with varying revenues, costs, and investments, each with associated probabilities. Calculate the expected net worth and IRR of each scenario to recommend the best investment option.

Paper For Above instruction

Financial Analysis and Evaluation of Investment Proposals

Introduction

Financial decision-making is central to corporate strategy and operational efficiency. Analyzing investments involves various tools such as income statements, internal rate of return (IRR), net present value (NPV), depreciation schedules, and cash flow analysis. This paper examines several scenarios through these tools, illustrating how companies can evaluate projects, investments, and new product launches to maximize shareholder value and ensure financial viability.

Forecasted Income Statement for Awesome Gadget, INC

To develop a three-year forecast for Awesome Gadget, INC, starting from base data in year 0, we incorporate the planned increases in sales price and reductions in unit costs. Year 0 revenue was $3,211,000 with a COGS of $2,281,500 and a product sale quantity of 84,500 units. The forecasted sales quantities for the next three years are based on growth assumptions, with sales price increasing by $2.50 annually, and COGS decreasing by 5% each year (Pike & Neale, 2014). Fixed costs remain constant, while depreciation is provided. These inputs inform the income statement, which is structured to reflect revenue, COGS, gross profit, operating expenses, depreciation, taxes, and net income. The projection helps assess profitability trends and investment return.

Investment Proposals Evaluation Using IRR

Investment proposals are scrutinized based solely on IRR. Proposal A1 requires an initial investment of $1,750,000 with annual cash flows of $510,000 and a salvage value of $80,000 after six years, yielding an IRR of 38.38%. Proposal A2 involves $1,550,000 investment with annual cash flows of $480,000 and salvage of $30,000, with an IRR of 44.00%. Proposal A3, with a higher investment of $2,250,000 and annual cash flow of $670,000, results in an IRR of 6.05%. Comparing these IRRs reveals Proposal A2 as the most financially advantageous, exceeding the MARR of 15% and maximizing firm value.

Depreciation and Sale Calculations

The analysis of a $5 million investment over 8 years utilizes MACRS 10-year schedule for depreciation calculations. Each year’s depreciation is determined by MACRS percentages, leading to a cumulative depreciation schedule. The book value after 8 years is calculated by subtracting accumulated depreciation from the original cost. Sale of the asset at year 8 prompts computation of capital gain or loss by comparing sale price to book value, and applicable taxes are computed based on the capital gains rate. This approach determines the after-tax profit or loss upon asset disposal, crucial for tax planning and investment appraisal.

Cash Flow and Present Worth for Marketing Program

The proposed marketing campaign requires an initial expenditure of $3,000,000, with projected sales, COGS, and expenses outlined annually. Accounts receivable, finished goods inventory, and accounts payable are calculated as percentages of revenues and costs. The net cash flow is derived by adjusting net income for non-cash expenses and working capital changes. Discounting these cash flows at 10% over three years yields the present worth. A positive NPV indicates a financially justified project, guiding management’s resource allocation decisions.

Assessment of R&D Investment

The R&D proposal entails an initial investment of $500,000 annually, financed by a 3% price increase. Revenue impacts include a 10% first-year decrease, followed by growth rates of 5%, 10%, and 15% over subsequent years. The analysis assesses whether the incremental revenue and strategic benefits outweigh the increased costs and potential market impacts over five years. Discounting future cash flows at 10% helps determine the net present value and the project's contributions to innovation and competitiveness (Brealey et al., 2014).

Evaluation of "Not-so-smart" Phone Model Investment

The $20 million investment aims to develop a simplified phone targetting a specific market segment over three years. Revenue reduction due to lower demand and additional S.G.&A costs are considered. Depreciation remains unchanged, and operational costs are evaluated to determine net cash flows. The project's viability depends on the comparison between the present value of cash inflows and initial investment, using a 15% discount rate. A positive NPV favors proceeding with the project.

Replacement Machine Analysis

Using MACRS depreciation rates, the project compares a 3-year life machine and a 6-year life machine over a 6-year span. The analysis calculates the annual depreciation, operating costs, salvage value, and tax implications, determining the net cash flows for each. The total present worth computed at 13% discounts indicates which machine replacement provides the highest financial return, considering the different lifespans and costs (Ross et al., 2015).

Investment Amount and Price Adjustment Impact

The initial investment needed to achieve a specified MARR is computed by adjusting cash flows iteratively until the present value equals the investment. For the price increase scenario, a 5% sales decline is incorporated into future cash flow projections. Discounting these changes at 15% yields the new present worth. These calculations help management understand the financial implications of pricing strategies and investment levels.

Expected Worth and IRR Under Probabilistic Scenarios

Three scenarios with different revenue, cost, and investment data are evaluated using weighted averages based on probabilities. The expected net worth is calculated as the sum of scenario NPVs weighted by their probabilities, as is the expected IRR. Such probabilistic analysis informs risk management and strategic decision-making, highlighting the investment’s potential profitability and variability under different market conditions (Hansen & Mowen, 2015).

Conclusion

Financial analysis tools such as income statement projections, IRR, NPV, depreciation schedules, and cash flow evaluations are invaluable for making informed corporate decisions. Applying these methods ensures optimal resource allocation, risk mitigation, and strategic positioning to enhance shareholder value while maintaining fiscal discipline.

References

• Brealey, R. A., Myers, S. C., & Allen, F. (2014). Principles of Corporate Finance. McGraw-Hill Education.
• Hansen, D. R., & Mowen, M. M. (2015). Managerial Accounting. Cengage Learning.
• Pike, R., & Neale, B. (2014). Corporate Finance & Investment: Decisions and Strategies. Pearson.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2015). Corporate Finance (11th ed.). McGraw-Hill Education.