Components and metrics of the capital project

Question

Problem:

The CFO will soon want you to look at the financial statements of the firm and analyze a capital project submitted by the manufacturing division, which the company is considering. The financial statements the CFO wants you to look at are the income statement, balance sheet, and statement of cash flows. The capital project is for a new production machine that will produce more output and cut costs.

1) Explain the items found on the 3 financial statements, what they mean, and how they relate to each other.

2) income statement

3) balance sheet

4) statement of cash flows

5) Explain what the key components and metrics are of the capital project and what factors would influence the company to proceed with the project or reject the project.

	2005		Industry Average:
Net Sales	367,500		Operating margin	13.00%
Cost of Goods Sold	175,000		Total asset turnover	1.80
Gross Profit	192,500		Current ratio	2.00
			Interest coverage ratio	12
Depreciation	40,000		Price to earnings ratio	12.0
Selling Expenses	60,000		Earnings per share	4.00
General and Administrative	48,000		Return on equity	28%
Total Operating Expenses	148,000
Operating Income	44,500
Interest Expense	4,000
Income Before Taxes	40,500
Income Taxes	9,500
Net Income	31,000
(in thousands except for stock price)
ASSETS
	2005
Cash and Cash Equivalents	9,500
Accounts Receivable	8,600
Inventories	60,000
Prepaid Expenses	9,000
Deferred Income Taxes	8,000
Total Current Assets	95,100
Property, Plant & Equip.	90,000
Intangible Assets	30,000
Total Assets	215,100
LIABILITIES AND EQUITY
Current Portion of Long-term Debt	2,000
Accounts Payable	40,000
Other Current Liabilities	9,000
Total Current Liabilities	51,000
Long-term Debt	5,000
Other Long-term Liabilities	9,000
Total Liabilites	65,000
Equity	150,100
Current stock price	30
Shares outstanding	10,000