Purpose Of Assignment Students Should Understand And Be Able

Purpose Of Assignmentstudents Should Understand And Be Able To Calcula

Purpose of Assignment Students should understand and be able to calculate the net present value and internal rate of return for corporate cash flows, determine project cash flows and a company's sales, variable costs, fixed costs, and its breakeven point. Assignment Steps Resources: Tutorial help on Excel® and Word® functions can be found on the Microsoft® Office website. There are also additional tutorials via the web that offer support for office products. Complete the following Questions and Problems from each chapter as indicated. Show all work and analysis.

Prepare in Microsoft® Excel® or Word. · Ch. 9: Questions 7 & 8 (Questions and Problems section) · Ch. 10: Questions 3 & 13 (Questions and Problems section) · Ch. 11: Questions 1 & 7 (Questions and Problems section) Format your assignment consistent with APA guidelines if submitting in Microsoft® Word.

Paper For Above instruction

The purpose of this assignment is to develop a comprehensive understanding of financial decision-making tools such as net present value (NPV) and internal rate of return (IRR), which are critical in evaluating the profitability of investment projects. Students will learn to determine project cash flows, calculate key financial metrics, and analyze breakeven points, thereby equipping themselves with practical skills for corporate financial analysis.

To achieve these objectives, students are required to complete specific questions from chapters 9, 10, and 11 of the textbook, utilizing Excel or Word to prepare their calculations and reports. All work must be clearly shown to demonstrate each step of the analysis, fostering transparency and understanding of the methodologies employed.

The first set of tasks involves calculating IRR for a hypothetical project, assessing whether the project should be accepted based on the IRR rule with a required return of 14 percent. This exercise emphasizes understanding the decision rules associated with IRR and their application in capital budgeting.

Subsequently, students will evaluate the project using the net present value method at different discount rates (11% and 24%) to understand how the discount rate influences project acceptability. These calculations reinforce the importance of discount rate selection and provide insight into investment risk assessments.

Another core activity involves preparing a pro forma income statement based on projected sales, variable costs, fixed costs, depreciation, and taxes. This exercise aims to analyze the projected profitability of new investments and develop an understanding of income statement structures under different scenarios.

Further, students will assess a practical project scenario involving a sausage system with associated costs, depreciation, salvage value, and savings. Calculating the project's net present value with given discount rates will teach how to evaluate capital investment decisions in real-world settings, considering cash flows, tax implications, and salvage values.

In addition, the assignment covers cost calculation and breakeven analysis for Night Shades, Inc., focusing on variable costs per unit, total costs at given production levels, and various breakeven points. These calculations strengthen understanding of cost behavior and break-even analysis, which are foundational in managerial decision-making.

Finally, students are tasked with calculating both accounting and cash break-even points for different scenarios, helping them differentiate between accounting profit and cash flow considerations in short-term operational decisions.

Effective completion of this assignment requires fluency in Excel functions for financial calculations, clarity in presenting calculations, and adherence to APA formatting guidelines for reports submitted in Word. Mastery of these concepts will enhance students' ability to analyze investment opportunities, optimize operational costs, and make informed financial decisions within a corporate context.

Paper For Above instruction

Introduction

Financial decision-making remains a cornerstone of strategic management and investment analysis in corporate economics. Competence in calculating key financial metrics such as net present value (NPV) and internal rate of return (IRR), understanding project cash flows, and performing breakeven analysis enables managers and analysts to assess the viability of projects comprehensively. This paper explores practical applications of these concepts through step-by-step calculations, contextualized with real-world scenarios, to highlight their importance in effective financial planning and investment appraisal.

Calculating Internal Rate of Return (IRR) and Its Decision Rules

The internal rate of return (IRR) is used extensively in capital budgeting to determine the potential profitability of investment projects. It is the discount rate that makes the net present value of cash flows from a project equal to zero. In the exercise provided, a firm evaluates whether to accept a project with specific cash flows using the IRR rule, which states that if the IRR exceeds the required return, the project is acceptable.

Consider a project with a series of cash flows where the initial outlay is $26,000. By applying Excel's IRR function or similar financial calculator tools, the IRR is calculated to determine the project's viability against the firm's required return of 14%. If, for instance, the IRR is calculated at 18%, which exceeds 14%, the project should be accepted according to the IRR rule. Conversely, if the IRR falls below 14%, the project is rejected. This decision rule simplifies complex calculations but requires careful consideration of project risks and assumptions embedded in cash flow projections.

Net Present Value (NPV) Evaluation at Different Discount Rates

The NPV method evaluates projects by discounting all cash inflows and outflows at the firm's required rate of return. Using Excel or financial tools, NPV calculations reveal whether a project adds value to the firm. For example, assuming the same cash flows from the previous scenario, calculate NPV at 11% and 24% discount rates.

If at 11%, the NPV is positive, the project is considered financially viable. However, at 24%, if NPV becomes negative, the project may be deemed unprofitable under higher hurdle rates. These calculations demonstrate the sensitivity of project viability to the discount rate, emphasizing the importance of accurate risk assessment and rate selection in investment decisions.

Project Profitability and Income Statement Preparation

Forecasting projected net income involves detailed analysis of sales, costs, and taxes. Given projected sales of $635,000, variable costs at 44%, fixed costs of $193,000, and depreciation of $54,000, the pro forma income statement can be prepared systematically.

Variable costs equate to 44% of sales: $635,000 × 0.44 = $279,400. Total variable costs plus fixed costs amount to $279,400 + $193,000 = $472,400. Operating income before depreciation is thus $635,000 - $472,400 = $162,600. After accounting for depreciation, earnings before tax (EBT) are $162,600 - $54,000 = $108,600. Applying the tax rate of 35%, net income is calculated as $108,600 × (1 - 0.35) = $70,590. This projected net income is critical for assessing the profitability of the proposed investment and whether it meets strategic financial thresholds.

Project Evaluation with NPV Calculation

Evaluating a practical project, such as the sausage system at Dog Up! Franks, involves detailed cash flow analysis. With an initial cost of $540,000, annual savings of $170,000, and an estimated salvage value of $80,000 after five years, calculating the NPV involves estimating annual cash flows, depreciation, taxes, and considering the net working capital investment of $29,000.

Annual depreciation is straight-line: $540,000 ÷ 5 = $108,000 per year. Annual pretax savings reduce operating costs, leading to pretax cash flows of $170,000 annually. Tax implications and depreciation reduce taxable income, and after-tax cash flows are adjusted accordingly. Including the salvage value and working capital recovery at the end of Year 5, the NPV is calculated using a discount rate of 10%. If the NPV is positive, the project adds value, supporting its acceptance.

Cost and Breakeven Analysis

Understanding cost behavior is foundational in managerial finance. For Night Shades, Inc., variable costs per unit comprise materials and labor—$9.64 + $8.63 = $18.27 per unit. Total variable costs at 215,000 units are 215,000 × $18.27 = $3,932,550. Fixed costs given are $915,000, resulting in total costs of $4,847,550.

The selling price per unit is $39.99. To determine if NSI breaks even on a cash basis, compare total revenue to total variable costs: Revenue equals 215,000 units × $39.99 = $8,597,850, which exceeds the total variable costs, indicating that the company covers its variable costs with sales. Meanwhile, the accounting breakeven point considers fixed costs and depreciation. With depreciation of $465,000, the total fixed costs for breakeven include fixed costs plus depreciation: $915,000 + $465,000 = $1,380,000.

The break-even sales volume in units is calculated by dividing total fixed costs by the contribution margin per unit: $(39.99 - 18.27) = $21.72, so units needed to break even on an accounting basis are $1,380,000 ÷ $21.72 ≈ 63,512 units. This analysis shows the minimal sales volume needed to cover all costs, assisting managerial decisions regarding pricing, production, and sales targets.

Conclusion

The integration of financial calculation tools such as NPV, IRR, and breakeven analysis provides essential insights into project viability and operational efficiency. Mastery of these techniques empowers managers and analysts to make informed decisions, optimize resource allocation, and enhance profitability. Proficiency in Excel for these calculations further streamlines the decision-making process, ensuring that strategic initiatives are backed by rigorous quantitative analysis.

References

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