Comprehensive Chapter 12 & 13 Problems
Monarch Corporation is going to start a new product line of products in a whole new market.
The data for analysis is presented below:
Cost of the equipment needed $194,000 five year property for tax depreciation
New working capital needs $50,000 will be recovered at the end of the third year
PROJECTED NEW REVENUES:
COST OF GOOD SOLD 30% OF SALES
VARIABLE CASH COSTS 10% OF SALES
ANNUAL FIXED CASH COSTS:
MAINTENANCE & OTHER $10,000
TOTAL FIXED COSTS $80,000
EQUIPMENT DISPOSAL PROCEEDS $19,400 SALVAGE VALUE AT THE END OF YEAR 6
FIRM'S COST OF CAPITAL 12.00%
TAX RATE 35%
Note – when computing tax, a net loss for the year means a positive tax savings is created since there is other income tax on other income to offset.
DEPRECIATION RATES FOR TAX PURPOSES:
YEAR ONE 20.00%
YEAR TWO 32.00%
YEAR THREE 19.20%
YEAR FOUR 11.50%
YEAR FIVE 11.50%
YEAR SIX 5.80%
All cash flows in years 1-6 occur at the end of the year. all initial cash inflows or outflows occur today.
A. ASSUMING SALES ARE $200,000 COMPUTE THE PAYBACK, IRR AND NPV. FOR THE NPV, COMPUTE AT BOTH THE FIRM'S DISCOUNT RATE AND 16%, WHICH IS A 4% PREMIUM ADDED TO THE RATE.
B. COPY THE WHOLE WORKSHEET AND SOLUTIONS FOR PART A TO THE WORKSHEET NAMED PART B, AND REDO THE COMPUTATIONS BY CHANGING THE ANNUAL SALES TO $250,000.
C. COPY THE WHOLE WORKSHEET AND SOLUTIONS FOR PART A TO THE WORKSHEET NAMED PART C, AND REDO THE COMPUTATIONS BY CHANGING THE ANNUAL SALES TO $300,000.
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