1. Ann and Marie have created an online business re-selling tablet computers for the elderly that have been retrofitted to be extremely easy to use yet contain the basic needed functions. The sales price and quantity sold in their first year of business are shown below. Although they did not keep very good records, they estimate their costs and expenses in the coming year will be as follows.
Data Block
Sales price $500 each
Quantity sold 100
Tablet purchase $350 each
Apps $25 each
Labor $25 each
Marketing $80,000 annual
Equipment and Facilities $50,000 annual
a What was the profit per tablet that was sold last year using the costs listed above?
b What is the breakeven quantity with the above data?
c What would they have to charge for each retrofitted tablet next year to break even if 1,000 are sold?
2. Best Biotechnology Corporation (BBC) has a new potential product developed by their research group that they are considering migrating from the lab into production. The expected cash flow is shown below.
IF BBC evaluates proposals using a discounted payback period approach where projects of this size must have a discounted payback in 4 years with a MARR of 16%. Should the product be put into production based on this data?
3. Precision Parts Manufacturing (PPM), is going to install a network server for all their machine tools and robots. They can either purchase the hardware/software, or lease it with monthly (end of month) payments for 4 years from the vendor. In addition to the cost of the hardware/software, depreciable upfront implementation costs will be incurred for both the leasing and purchasing alternatives, and will be performed in the same year as purchased or leased.
The data is shown below where no change in working capital is expected. A MACRS 3-year deprecation schedule will be used. If PPM uses a MARR of 15%, a tax rate of 20% for both Income and Capital gains, and a 4-year times span for evaluating proposals, should the networking system be purchased or leased using a present worth criterion.
MACRS Rates(%)
4.The investment Committee for the Herrera Hedge Fund (HHF) has 5 proposals from which to choose to be funded with $10 billion in capital that they have recently raised. Assume any funds not invested will earn 0% interest. Their only criteria for investments at Herrera is the internal rate of return with the minimal acceptable rate of return being 20%. Which alternative(s) should be funded if the projects have the following forecasted cash flows. All values are in billions of dollars although adding all the zeroes will not change the answer.
5. Bob, the new Chief Marketing Officer at the XYZ company has proposed an expansion of the companies marketing efforts. He claims that an investment of $1,000,000 in marketing research this year, and following this with an increase in marketing expenditures of $250,000 a year will increase sales by 10% each year over the sales forecasted without the marketing program. The sales forecasts and costs are shown below. The market research study is not depreciable but should be considered as an investment in year 0.
Should Bob's plan be approved using the PW and IRR criteria using a 4-year analysis.
6. The CEO of Quality Pharmaceuticals Inc. (QPI) is getting pressure from the Board of Directors to reduce costs. It has been suggested that production be moved off shore to save costs. Data has been collected concerning the off-shore alternative and the costs presently being incurred with domestic production. The relevant costs are shown below. There would not be any investment involved and revenues are not expected to change. Inventory is expected to increase, but no change is expected in accounts receivable and payable. Using a five year time span and based on an Annual Worth criterion, what is the annual equivalent savings by the Offshore alternative.
7. Latest Motor Electronics (LME) is evaluating a proposal to create a new automated production process for a new product line. In the past year (year -1) $1 million has been spent researching this capability and it look promising. The proposal is to purchase machinery and install it this year (year 0). Next year (year 1) will be spent developing the capability (experimenting, debugging and training).
Shipments of products are expected to start in the following year (year 2) starting with $3,500,000 in revenues in that year and with a 25% growth annually in the years thereafter. COGS are forecasted to be 30% of revenues. Using a present worth criteria in a 5-year analysis, determine if it is financially justified to proceed with this project.
S.G.& A. are expected to be a constant $900,000 annually during the revenue years. In the development year, S.G. & A. is included in the Development estimate.
Investments should be depreciated using MACRS over 7 years and will have two components; one for the Machinery purchase and installation, and the other starting a year later for the Development investment. The depreciation starts in the year following when the investment is made. The salvage value is zero.
Ignore any Working Capital considerations.
Using the present worth criterion in a 5-year analysis (development year plus 4 revenue years), determine if it is financially justified to proceed with this project.
8. Maryland Technical Acumen (MTA) is considering a new product line which will require an investment in production equipment and facilities in the current year.
Below is an Income and cash flow statements that management has approved. (If there are errors or oversights, that is their problem, not yours).
a. Determine the how the present worth would be affected by prices of $47, $49, $51 and $53 with a quantity sold of 55,000. Briefly state how you determined this.
b. Determine the quantity that would need to be sold to attain the MARR (PW = 0) for prices of $47, $49, and $51. Briefly state how you determined this.
9. Due to the budget sequester, the bridge department had their repair budget reduced for the coming year. The cost of repair for several bridges needing repair are shown below. Also shown is the average number of cars per day that travel over each bridge, and an estimated cost per car to detour if the bridge becomes unusable. The benefits of repairing a bridge are evaluated as the cost avoidance of a bridge becoming unusable for 90 days.
If the new budget if $7,500,000, which bridges should be repaid from a benefit and cost perspective?
10. A state legislature has appropriated $15 million to purchase and prepare the property for several new state parks. Alternatives have been suggested and forecasts for acquisition, preparation and annual operating costs have been estimated and listed below for each alternative. Also listed are the forecasted annual benefits to the community in dollars.
Annual Benefits are to be computed as Net Benefits or Annual Benefits minus Annual Operating Costs. The investment is the sum of Acquisition costs and Preparation Costs.
The planning time horizon should consider the acquisition and preparation as being done in the current year and then for 20 years thereafter. The value of the park at the end of the 20 year time horizon (salvage value) can be ignored. (all numbers are in millions of dollars) Use an annual discount rate of 7% in the evaluation. Any funds left in the budget after the acquisition and preparation phase can be used for additional enhancements to the parks.
Using a B-C method for evaluations, determine which ones should be chosen.
Using a B/C method for evaluations, determine which ones should be chosen.
What non-financial considerations might be important?
Data Block
Sales price $500 each
Quantity sold 100
Tablet purchase $350 each
Apps $25 each
Labor $25 each
Marketing $80,000 annual
Equipment and Facilities $50,000 annual
a What was the profit per tablet that was sold last year using the costs listed above?
b What is the breakeven quantity with the above data?
c What would they have to charge for each retrofitted tablet next year to break even if 1,000 are sold?
2. Best Biotechnology Corporation (BBC) has a new potential product developed by their research group that they are considering migrating from the lab into production. The expected cash flow is shown below.
IF BBC evaluates proposals using a discounted payback period approach where projects of this size must have a discounted payback in 4 years with a MARR of 16%. Should the product be put into production based on this data?
3. Precision Parts Manufacturing (PPM), is going to install a network server for all their machine tools and robots. They can either purchase the hardware/software, or lease it with monthly (end of month) payments for 4 years from the vendor. In addition to the cost of the hardware/software, depreciable upfront implementation costs will be incurred for both the leasing and purchasing alternatives, and will be performed in the same year as purchased or leased.
The data is shown below where no change in working capital is expected. A MACRS 3-year deprecation schedule will be used. If PPM uses a MARR of 15%, a tax rate of 20% for both Income and Capital gains, and a 4-year times span for evaluating proposals, should the networking system be purchased or leased using a present worth criterion.
MACRS Rates(%)
4.The investment Committee for the Herrera Hedge Fund (HHF) has 5 proposals from which to choose to be funded with $10 billion in capital that they have recently raised. Assume any funds not invested will earn 0% interest. Their only criteria for investments at Herrera is the internal rate of return with the minimal acceptable rate of return being 20%. Which alternative(s) should be funded if the projects have the following forecasted cash flows. All values are in billions of dollars although adding all the zeroes will not change the answer.
5. Bob, the new Chief Marketing Officer at the XYZ company has proposed an expansion of the companies marketing efforts. He claims that an investment of $1,000,000 in marketing research this year, and following this with an increase in marketing expenditures of $250,000 a year will increase sales by 10% each year over the sales forecasted without the marketing program. The sales forecasts and costs are shown below. The market research study is not depreciable but should be considered as an investment in year 0.
Should Bob's plan be approved using the PW and IRR criteria using a 4-year analysis.
6. The CEO of Quality Pharmaceuticals Inc. (QPI) is getting pressure from the Board of Directors to reduce costs. It has been suggested that production be moved off shore to save costs. Data has been collected concerning the off-shore alternative and the costs presently being incurred with domestic production. The relevant costs are shown below. There would not be any investment involved and revenues are not expected to change. Inventory is expected to increase, but no change is expected in accounts receivable and payable. Using a five year time span and based on an Annual Worth criterion, what is the annual equivalent savings by the Offshore alternative.
7. Latest Motor Electronics (LME) is evaluating a proposal to create a new automated production process for a new product line. In the past year (year -1) $1 million has been spent researching this capability and it look promising. The proposal is to purchase machinery and install it this year (year 0). Next year (year 1) will be spent developing the capability (experimenting, debugging and training).
Shipments of products are expected to start in the following year (year 2) starting with $3,500,000 in revenues in that year and with a 25% growth annually in the years thereafter. COGS are forecasted to be 30% of revenues. Using a present worth criteria in a 5-year analysis, determine if it is financially justified to proceed with this project.
S.G.& A. are expected to be a constant $900,000 annually during the revenue years. In the development year, S.G. & A. is included in the Development estimate.
Investments should be depreciated using MACRS over 7 years and will have two components; one for the Machinery purchase and installation, and the other starting a year later for the Development investment. The depreciation starts in the year following when the investment is made. The salvage value is zero.
Ignore any Working Capital considerations.
Using the present worth criterion in a 5-year analysis (development year plus 4 revenue years), determine if it is financially justified to proceed with this project.
8. Maryland Technical Acumen (MTA) is considering a new product line which will require an investment in production equipment and facilities in the current year.
Below is an Income and cash flow statements that management has approved. (If there are errors or oversights, that is their problem, not yours).
a. Determine the how the present worth would be affected by prices of $47, $49, $51 and $53 with a quantity sold of 55,000. Briefly state how you determined this.
b. Determine the quantity that would need to be sold to attain the MARR (PW = 0) for prices of $47, $49, and $51. Briefly state how you determined this.
9. Due to the budget sequester, the bridge department had their repair budget reduced for the coming year. The cost of repair for several bridges needing repair are shown below. Also shown is the average number of cars per day that travel over each bridge, and an estimated cost per car to detour if the bridge becomes unusable. The benefits of repairing a bridge are evaluated as the cost avoidance of a bridge becoming unusable for 90 days.
If the new budget if $7,500,000, which bridges should be repaid from a benefit and cost perspective?
10. A state legislature has appropriated $15 million to purchase and prepare the property for several new state parks. Alternatives have been suggested and forecasts for acquisition, preparation and annual operating costs have been estimated and listed below for each alternative. Also listed are the forecasted annual benefits to the community in dollars.
Annual Benefits are to be computed as Net Benefits or Annual Benefits minus Annual Operating Costs. The investment is the sum of Acquisition costs and Preparation Costs.
The planning time horizon should consider the acquisition and preparation as being done in the current year and then for 20 years thereafter. The value of the park at the end of the 20 year time horizon (salvage value) can be ignored. (all numbers are in millions of dollars) Use an annual discount rate of 7% in the evaluation. Any funds left in the budget after the acquisition and preparation phase can be used for additional enhancements to the parks.
Using a B-C method for evaluations, determine which ones should be chosen.
Using a B/C method for evaluations, determine which ones should be chosen.
What non-financial considerations might be important?
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