Reporting And Valuation For Undergraduates 273792

Reporting And Valuation For Undergraduates

Reporting and Valuation for Undergraduates 1 Below is a 2-part question. Please create a word document and/or spreadsheet to answer the following prompts. Upload your response according to the directions. Part I: Reporting and Financial Statement Analysis 1. Given the following income statements, calculate the estimated cash flow for years 20x1 and 20x2. 2. Given the following income statements, calculate the interest coverage (time interest earned) ratio for years 20x1 and 20x2. 3. Given the following income statements, calculate the net profit margin ratio for years 20x1 and 20x2. Income Statement for years 20x1 and 20x2 20x1 20x2 Sales $5,450 $5,000 Operating Costs excluding Depreciation and Amortization 4,775 4,250 EBITDA Depreciation and Amortization 40 180 EBIT $635 $570 Interest Expense 62 200 EBT $573 $370 Taxes (40%) NI $344 $222 4. Based solely on the following balance sheets, calculate the current ratio for years 20x1 and 20x2? 5. Based solely on the following balance sheets, calculate the debt ratio for years 20x1 and 20x2. Balance Sheet ending December 31 for years 20x1 and 20x2 20x1 20x2 Assets: Cash $275 $250 Short Term Investments 55 50 Accounts Receivable Inventories Total Current Assets $1,530 $1,300 Net Plant and Equipment 2,925 2,750 Total Assets $4,455 $4,050 Liabilities: Notes Payable $192 $100 Accounts Payable Miscellaneous Payables Total Current Liabilities $1,017 $450 Long-Term Debt Total Liabilities $1,567 $950 Common Stock 2154 2,600 Retained Earnings Less Treasury Stock 46 0 Total Shareholder Equity $2,888 $3,100 Liabilities and Shareholder Equity $4,455 $4,050 6. Based on both the income statements and balance sheets, calculate the return on assets (return on investment) ratios for years 20x1 and 20x2. 7. Based on both the income statements and balance sheets, calculate the total asset turnover ratio for years 20x1 and 20x2. Part II: Capital Budgeting and Financing Considerations 8. Given the following cash flows of two mutually-exclusive projects, A and B, calculate the NPV for each project. Both Project A and Project B have an estimated cost of capital of 10%. Cash flows will be realized at the end of each time period. Which, if either, project should be accepted? Why? Explain. Year, t A B 0 -2,000 -1,,,, BFA107 – FINANCIAL MANAGEMENT College of Business and Economic ( Semester 1, 2019 ) Description: BFA107 FINANCIAL MANAGEMENT Semester 2, 2018 Assessment 2: Written assignment Assessment: 15% Your assignment involves preparing a written report where you will present an analysis of financial information relating to a capital investment project described in the attached case study and provide recommendations that will assist the firm in its decision making. Length: 1,500 words maximum – this requirement refers to the written analysis section of the assignment only and is a “maximumâ€. Students will not be penalised for using fewer words and making their report more succinct. If you submit over-length work, there will be an automatic 10% penalty of the total possible marks for this assessment. Title pages, calculations section, reference lists and appendices are included in the word count. Assessment criteria: Please see the assessment rubric uploaded on MyLo under assessment 2 folder for information on the assessment criteria which will be applied when marking the assignment. Percentage weighting : This assignment is worth 15%the final mark for the unit Due date : Wednesday, 15 May 2019 by 5pm CASE STUDY Tasmanian Motor Rental (TMR) is set up as a proprietary company in car rental industry and is considering whether to enter the discount rental car market in Tasmania. This project would involve the purchase of 100 used late model, mid-sized cars at the average price of $15,000. In order to reduce their insurance costs, TMR will have a LoJack Stolen Vehicle Recovery System installed in each car at a cost of $1,500 per vehicle. The rental car operation projected by TMR will have two locations: one near Hobart airport and the other near Launceston airport. At each location, TMR owns an abandoned lot and building where it could store its vehicles. If TMR does not undertake the project, the lots can be leased to an auto-repair company for $90,000 per year (Total amount for both lots). The $25,000 annual maintenance cost (total for both lots) will be paid by TMR whether the lots are leased or used for this project. This discount rental car business is expected to result in a fall in its regular car rental business by $20,000 per year. For taxation purposes, the useful life of the cars is determined to be five years and they will be depreciated using the straight-line depreciation method over 5 years with no residual values at the end. It is assumed that the cars will first be used at the beginning of the next financial year: 1 July 2019. Before starting this new operation, TMR will need to redevelop and renovate the buildings at each airport locations. This is expected to cost $215,000 for both locations. Assume that TMR is not able to claim any annual tax deduction for the capital expenditure to the renovation of the building until the business is sold. TMR has also budgeted marketing costs which will be spent at the initiation of the project and also during the first two years of operation. The estimated costs are $30,000 per year. These costs are fully tax deductible in the year they are incurred. In addition, if the project is undertaken, a total new injection of $150,000 in net working capital will be required. There will be no additional working capital required from the commencement of the operation until the end of the project. The initial networking capital will be recovered in full by the end of year 5. Revenue projections from the car rental for the next five years are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Beginning 1/7//7//7//7//7/2023 Ending 30/6//6//6//6//6/2024 Revenue ($ ‘,,,,250 Operating variable costs associated with the new business represent 10% of revenue. Annual operating fixed costs (excluding depreciation) are $1,800 per vehicle. Existing administrative costs are $550,000 per annum. As a result of the new operation, these administrative costs will increase by 20%. The company is subject to a tax rate of 27.5% on its profits. Catherine, the company CFO would like you to help her examine the viability of the project for the next five years, taking into account the projections of sales and operations costs prepared by company’s accountants. Given the risk associated with the project, she believes it is reasonable to use a cost of capital of 12% for the evaluation of this project. Your tasks: Based on the information in the case study, Catherine has asked you to write a report to TMR’s management advising them as to the best course of action regarding this project. Your report should address the following specific questions asked by TMR’s management: 1. Discuss which costs are relevant for the evaluation of this project and which costs are not. Your discussion should be justified by a valid argument and supported by references to appropriate sources 2. How are possible cannibalization and opportunity costs considered in this analysis? 3. Determine the initial investment cash flow. 4. Estimate all cash flows associated with the project over 5 years. It is assumed that where relevant, capital expenditures and marketing costs are expended throughout the year, while cash flows relating to revenue and operating costs occur at the end of the year. You will need to broadly describe the method used for determining those cash flows. 5. Calculate the project’s payback period. Assuming the business could be sold at the end of the five years for $1 million. This figure includes the value of the car fleet, premises and capital gain from the business. Ignore any possible tax consequences of selling the business and also ignore the time value of money for this particular calculation. Briefly comment on your results 6. Estimate the Net present value (NPV) of the project, assuming that the initial investment could be sold at the end of the five years for $1 million. This figure includes the value of the car fleet, premises and capital gain from the business. Ignore any possible tax consequences of selling the business. Briefly comment on your results and make appropriate remarks on the assumptions made for these calculations if necessary. 7. Using sensitivity analysis, recalculate NPV using the scenario of a decrease in project sales by 10% annually. Briefly comment on your results. 8. In view of your answer to Point 5 to point 7 above, advise TMR’s management as to whether they should go ahead with the investment project. In your recommendations, you may wish to suggest possible refinements in the method used for evaluating this project. ASSIGNMENT INSTRUCTIONS: · Your assignment should be presented as a structured report with an introduction, a main body and a conclusion, but without inclusion of any calculations in the main body. · The main body of the report may include headings addressing the specific questions asked by TMR’s management. · The final part of your assignment (Point 8 above) should include a general recommendation to management regarding the best course of action in the intended project. If you believe that further information is required before making a firm recommendation, you need to specify what information would be required. · Any assumption that you may rely upon for your analysis and recommendation should be clearly stated in the main body of your report. · All calculations should be presented in appendices to the report . Calculations may be prepared in an excel document, however your submission must be in the form of a single word document including the report itself and the appendices. · All external sources used to support your argument should be appropriately acknowledged in the main body of your report using the Harvard style (Author-date) of referencing. This includes textbook sources but not the case study itself. A list of the full citation should be included at the end of the main body of your report.

Paper For Above instruction

The assignment involves conducting a comprehensive financial analysis for a proposed project by Tasmanian Motor Rental (TMR), evaluating its viability through several financial metrics and strategic considerations. The primary aim is to assess whether the project should be undertaken, relying on detailed calculations of cash flows, returns, and risks, and supported by sound financial theory and strategic insights.

The analysis begins with identifying relevant costs and evaluating their impact on project valuation. Relevant costs include initial capital expenditures like purchasing vehicles, installing security systems, renovation costs, and marketing expenses incurred at project initiation. These costs directly affect cash flows and are therefore relevant. Conversely, sunk costs, such as costs already committed or avoidable future costs unrelated to the decision-making process, do not influence the current evaluation. For example, past expenses related to existing administrative costs are not considered in the project’s incremental cash flows.

Next, the issue of cannibalization and opportunity costs requires careful consideration. Cannibalization occurs when the new project's revenue reduces existing business revenue, which in this case is the estimated $20,000 annual fall in regular rental income. This opportunity cost needs to be included as a reduction in incremental revenue. Opportunity costs, such as the foregone leasing income from the lots if the project is pursued, are considered as costs because they represent benefits foregone by choosing one alternative over another. Therefore, both cannibalization and opportunity costs diminish the project's net benefits and should be incorporated into cash flow estimations.

The initial investment cash flow includes the purchase cost of vehicles, installation of security systems, renovation costs, upfront marketing expenditures, and the initial working capital injection. Specifically, purchasing 100 used cars at $15,000 each, installing LoJack systems at $1,500 per vehicle, renovating the facilities, and the upfront marketing costs form the core of the initial outlay. The net working capital investment, totaling $150,000, is also incorporated. These outlays are typically considered as negative cash flows occurring at the beginning of the project.

Estimating future cash flows involves projecting revenues based on rental income over five years, deducting variable operating costs (10% of revenue), fixed operating costs (per vehicle), increased administrative costs, and taxes. The projected revenue declines annually by 10%, modeled via a sensitivity analysis. Capital expenditure for vehicle replacement and end-of-project sale value, along with the recovery of working capital, are included to compute the total cash flows for each year. The method typically involves calculating Earnings Before Tax (EBIT), adjusting for depreciation (a non-cash charge), and taxes to arrive at net cash flows, which are then discounted at the company’s weighted average cost of capital (12%) to determine net present value (NPV).

The payback period metric measures how long it takes for cumulative cash inflows to recover the initial investment, ignoring the time value of money. Assuming the project’s sale at year 5 for $1 million, the cash flows are aggregated annually to assess when break-even occurs. The NPV calculation incorporates discounted cash flows over five years, considering the terminal sale value. The sensitivity analysis modifies revenue projections downward by 10% per year to test the robustness of project viability under risk scenarios, highlighting the importance of market assumptions in investment decisions.

Based on the analytical results, including NPV and payback period estimates, recommendations are formulated for management. A positive NPV and a reasonable payback period would support project acceptance, while negative NPV or prolonged payback would suggest reconsideration. Additional considerations such as strategic fit, market conditions, and risk mitigation strategies are also discussed, along with suggestions for methodological improvements like scenario planning or real options analysis for better decision-making.

References

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