TMAN 625 Final Exam, Spring 2015

| June 4, 2016

Question
TMAN 625 Final Exam, Spring 2015

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Question 1

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Money-Maker Hedge fund has narrowed down their investment decision to three proposals from
which two are to be selected. The investment amounts, estimated annual cash flows, and
estimated salvage values for the three proposals are shown below. A MARR of 16% and a six
year time-span is to be used. Unused fund should be ignored since they will be returned to
investors.
Determine which two should be chosen to maximize the financial worth of the company?
Proposal

Investment

A1
A2
A3

($1,750,000)
($1,550,000)
($2,250,000)

MARR
Years

16.0%
6

Solution

Annual cash
flow
$484,000
$435,000
$615,000

Salvage in
last year
$55,000
$0
$70,000

Question 2

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Storm Occurrence Services (SOS) offers services to secure houses and properties when major storms are forecast for an area. They do such things as fasten plywood over windows, install pumps and
generators, trim and brace trees, etc. They keep an inventory of trailers, tools and supplies year round which incur annual maintenance and repair costs. Additional supplies are purchased locally at the time of
each storm preparation. Staff are "on-call" when the storms are forecasted. Financial data is shown below.
Price
Price for each storm per customer
Quantity
Number of storms * Number of customers
Supplies per customer per storm
Labor per customer per storm
Maintenance and storage

Examples
$1,000
(e.g. 4 storms *20 customers would be a quantity of 80)
$250
$500
$50,000

Annual

a What would be the annual profit for a season in which there are 5 major storms in a year and they had 50 customers?
b How many customers are needed to break even if there are 3 major storms in a storm season?
Solution

Question 3

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Awesome Gadget, Inc. is considering making a $750,000 investment in its production capabilities to produce a new product
line. Forecasted sales quantities for the new product are shown below. The tax rate, working capital, and MARR are also
shown below.
The price per unit will be $39.99 for all 3 upcoming years. COGS per unit is forecast to be $24.75 for the upcoming three years.
SG&A, excluding depreciation, will be $950,000 in year 1 and increased arithmetically by $50,000 in the following two years.
Depreciation for each year is to be recorded as straight line over three years. The salvage value is zero.
Using this data, prepare a three year proposal income statement (only) for years 1-3. The income statement must be in the
standard accounting sequence and format with appropriate subtotals and totals.
Years
Forecasted sales quantities
Working capital
Income Tax rate
MARR
Solution

0
$700,000.00
14.00%
20.00%

1
90,000
$720,000.00

2
120,000
$740,000.00

3
150,000
$750,000.00

Question 4

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Fresh Organic Farm Foods, Inc. is considering extending into a new sales region. To do this they would add an additional salesperson at
$150,000 annually (includes all benefits and travel expenses). Also needed is an additional office in this new sales region that would cost
$100,000 annually, which includes an telephone answering service. This proposal would not involve any new depreciable assets.
Revenue from the new sales regions estimated at $500,000 in year-1, $600,000 in year-2, and $750,000 in both year-3 and year-4.
COGS is 50% of the revenue that includes delivery costs from existing warehouses.
Accounts receivable is forecasted to be 25% of revenue. Accounts Payable is forecast to be 20% of the cost of goods sold. Food
Inventory is forecast at 35% of revenue. Wages payable is forecasted at 15% of the salespersons salary. The Year 0 values of working
of these are all zero since this is a new sales region.
.
A proposal income statement for a proposal time span of 4 years is shown below. Use a tax rate of 25% and a MARR of 10%.
a Prepare a cash flow statement.
b Determine the present worth.
c Discuss in one or two sentences which item(s) particularly affect the decision to accept or reject?
Year
Revenue
COGS
Salesperson Salary
Office rental
Proposal life span
Income tax rate
MARR

0
50%
$150,000
$100,000
4
25%
10%

1
$500,000
of revenue

2
$600,000

3
$750,000

4
$750,000

2
$600,000
($300,000)
$300,000
($150,000)
($100,000)
$50,000
($12,500)
$37,500

3
$750,000
($375,000)
$375,000
($150,000)
($100,000)
$125,000
($31,250)
$93,750

4
$750,000
($375,000)
$375,000
($150,000)
($100,000)
$125,000
($31,250)
$93,750

years
annually
annually (EAR)

Income Statement
Year
Revenue in new region
COGS
Gross Margin
Sales Person Salary
Office Rental
EBIT
Income Taxes
Net Income
Solution

0

1
$500,000
($250,000)
$250,000
($150,000)
($100,000)
$0
$0
$0

Question 5

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Armen’s Armenian Restaurant often has a line of customers waiting to get seated. There is an adjacent store front
that could be rented to expand their business. The added space would enable sales to be increased to the amounts
shown below. The year 0 (present year) sales of $600,000 would continue as shown if the proposal is not
implemented.
The present kitchen facilities can be expanded and enhanced to handle the added volume. The investment needed
for the kitchen enhancements, additional tables and booths, and renovations is $250,000. Consider this as
depreciable over 5 years using MACRS.
COGS including wait staff and food is 35% of revenue. Annual rent, cleaning, etc. is presently $200,000 annually
and would increase to be $350,000 with the added space. Working capital considerations are minimal and should
be omitted.
Income taxes rate is 12.5%. Any capital gains will be insignificant and should be ignored. A MARR of 6% should be
used.
Determine if the proposal is financially justified using the following data and a 3-year time span.

Revenue
MARR: 5 year
Solution

Year
$600,000
Percentage

1
$800,000
20%

2
$1,000,000
32%

3
$1,200,000
19.20%

4
11.52%

Question 6

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Smart Phone, Inc. is considering a new phone model to be aimed at the senior citizen market to be called the "Wise-Phone". The new
phone would not have a camera, GPS capabilities and other capabilities that require special hardware/chips. It simply would be a good
user-friendly wireless telephone with a touch screen.
A market research study determined that there indeed was a market for such a phone as a substantial number of users in this market
segment only use the telephone capabilities. The downside is that it would result in a decrease in demand for the present "Smart"
model.
A one-time investment in year 0 for introducing the new product would require $250,00,000. This investment is not depreciable.
The price of the "Smart phone is $125 and the price of the "Wise" phone would be $50.
The COGS of the If the ‘Smart" phone is 40% of it revenue and the "Wise" phone is 60% of its revenue. The addition of the "Wise"
phone would increase the S.G.& A. from $500,000 $575,000 .
Determine if this proposal is financially justified using a 4-year time span.
Price "Smart" phone
Price "Wise" phone

$125
$50
0

Sales quantity without Wise
Sales quantity with Wise
Smart
Wise
Smart COGS
Wise COGS
Smart SG&A
Wise and Smart SG&A
Investment in year 0
Income tax rate
MARR
Solution

40%
60%
$500,000
$575,000
$250,000
17%
12%

1
20,000

2
24,000

3
28,000

4
30,000

19,000
7,500
of its revenue
of its revenue

22,000
9,000

25,000
10,500

37,500
12,000

Question 7

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Two alternative replacement machines are described below that are being considered to replace a current one
that has no salvage value. The present machine must be replaced and the replacement will not have any effect
on quantity produced, quantity sold, revenue, nor S.G.& A. (except depreciation). The cost of the replacement
machine will be depreciated using 5-year MACRS. The project evaluation time span should be 3 years.
Machine A, while less expensive at $100,000, only has a life span of 3 years. Its salvage value at the end of
three years is $7,500. The annual COGS using this machine will be $8,500.
Machine B is more expensive at $150,000 but will last 6 years and has a lower annual operating costs. Its worth
(salvage value) at the end of three years is $60,000. The annual COGS using this machine will be $5,000.
Performa a financial analysis to determine the better alternative from a financial perspective. Use a MARR of
13%, income tax rate of 30% and a capital gains tax rate of 15%.
Data block
MARR=
Income Tax rate
Capital Gains rate
Time span
Machine
Purchase Cost
Salvage Value
Annual COGS
3-year MACRS
Solution

13.00%
30.0%
15.0%
3
years
A
B
$100,000
$150,000
$7,500
$60,000
$8,500
$5,000
Year
1
Percentage
33.33%

end of year-3
2
44.45%

3
14.81%

Question 8

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0

Below are Income and cash flow statements for a new product model. Management has approved these statements but wants to
look at some alternatives. The cells with a shaded background in column D contain the original values and are shown only to
assist you in reverting back to the original values if needed. All question parts should start from the original data.
a

Determine the unit price to attain a PW = $250,000. Describe how you determined this.

b

Starting with the original values, determine the COGS each for which the present worth is zero. Describe how you
determined this.

c

Two estimates are shown below of the Sales Quantity in year 1, and the Sales Quantity Annual Increase. The two estimates
are equally probable. Using these two estimates, determine the expected present worth. Start with the original values.
Estimates
Sales quantity in Year 1
Sales Quantity Annual Increase

1
35000
20%

2
45000
25%

Model
Copy of Original
Values
Sales quantity in Year 1
Sales Quantity Annual Increase
Unit Price (all years)
COGS each
S.G.& A.
Income tax rate
MARR
Investment
Years
Sales Quantity Forecast
Depreciation 5-year MACRS
Book Value

Cash Flow Statement
Net Income
Add depreciation
Investment
Change in Working Capital
Cash flow

Solution

35,000
20%
$40.00
$12.00
$750,000
20%
15%
$2,000,000
1
35,000
20.00%
$1,600,000

2
42,000
32.00%
$960,000

3
50,400
19.20%
$576,000

4
60,480
11.52%
$345,600

5
72,576
11.52%
$115,200

6
87,091
5.76%
$0

0

1
$1,400,000
($420,000)
$980,000
($750,000)
($400,000)
($170,000)
$34,000
($136,000)

2
$1,680,000
($504,000)
$1,176,000
($750,000)
($640,000)
($214,000)
$42,800
($171,200)

3
$2,016,000
($604,800)
$1,411,200
($750,000)
($384,000)
$277,200
($55,440)
$221,760

4
$2,419,200
($725,760)
$1,693,440
($750,000)
($230,400)
$713,040
($142,608)
$570,432

5
$2,903,040
($870,912)
$2,032,128
($750,000)
($230,400)
$1,051,728
($210,346)
$841,382

6
$3,483,648
($1,045,094)
$2,438,554
($750,000)
($115,200)
$1,573,354
($314,671)
$1,258,683

($136,000)
$400,000

($171,200)
$640,000

$221,760
$384,000

$570,432
$230,400

$841,382
$230,400

$1,258,683
$115,200

($2,000,000)

($140,000)
$124,000

($28,000)
$440,800

($33,600)
$572,160

($40,320)
$760,512

($48,384)
$1,023,398

($58,061)
$1,315,822

Present Worth
=
$329,840

Income Statement
Sales revenue
Cost of goods sold
Gross Margin
General, Sales and Admin.
Depreciation
EBIT
Income tax
Net income

35,000
20%
$40.00
$12.00
$750,000
20%
15%
$2,000,000
0

IRR
19.4%

0

(2,000,000)

Question 9

Score

The city maintenance department team has noted four major intersections that have high accident rates. Staff are
sufficient to supervise one major intersection improvement project each year. Shown below are the cost estimates to
repair them. Also shown are the average number of accidents per year at each of the intersections. These accident counts
should be considered as the number of accidents that could be avoided if an intersection is rebuilt. Which intersection
should be chosen first to be rebuilt?

Proposal
Oak and Elm
Commerce and 8th
River and 32nd
Lincoln and Carter
Great Rock and 3rd
Good Hill and 101st
2nd and Main
Solution

Costs to Replace
$1,900,000
$1,875,000
$2,150,000
$2,000,000
$1,400,000
$2,400,000
$1,500,000

Accidents per
year
84
78
95
97
68
105
65

0

Question 10
A recent newspaper article suggested that some hedge funds that purchase companies are asking (forcing?) vendors of the purchased companies to accept payments terms
of Net 90 or Net 120, meaning that the customer would have 90 or 120 days respectively to pay the vendor for a purchase. Traditionally, payment terms have been Net 30.
Why would this change be requested? Discuss how this would affect the financial statements of the customer and vendor? Post your answer below or in a separate MS
Word document.

Score

0

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