Income statement and balance sheet below determine the

Question

Question 1

Using the Income Statement and Balance Sheet below determine the following financial evaluations. Put answers using equations in the cells under "Answers" in Column C.

Answers

a Market capitalization
b Current ratio
c Quick Ratio
d Debt Ratio
e Earnings per share (EPS)
f Price Earnings Ratio (PE)
g Profit Margin
h Briefly, within the space provided below, discuss implications of the above answers.

Income Statement		Year x			Balance Sheet		Year x
Revenue		$15,000,000		Assets
	Returns, Credits, etc.	($5,000)			Current Assets
	Net Sales (Revenue)	$14,995,000				Cash	$80,000
Direct Costs						Accounts receivable	$60,000
	Labor	($4,000,000)				Finished Goods Inventory	$40,000
	Materials	($2,500,000)				Materials Inventory	$60,000
	Cost of Goods Sold (COGS)	($6,500,000)			Total Current Assets		$240,000
	Gross Margin	$8,495,000
Selling General and Admin.					Long term Assets
	Marketing	($1,250,000)				Buildings	$10,000,000
	Research and Development	($1,000,000)				Furniture	$3,000,000
	Administration	($750,000)				Other	$1,500,000
	Other	($500,000)			Total Fixed Assets		$14,500,000
	Depreciation	($250,000)		Total Assets			$14,740,000
	S G & A	($3,750,000)
Earnings Before Interest and Taxes (EBIT)		$4,745,000		Liabilities
	Interest Expense/Income	($162,300)			Current Liabilities
	Pre-tax Income	$4,582,700				Notes Payable	$100,000
	Income Tax @ 30%	($1,374,810)				Accounts Payable	$125,000
	Net Income	$3,207,890				Taxes Payable	$10,000
					Total Current Liabilities		$235,000
					Long Term Liabilities
						Bank Loans @ 6%	$455,000
	Current Stock Price	$28.00				Mortgage @ 4.5%	$3,000,000
	Current Outstanding Shares	600,000			Total Long Term Liabilities		$3,455,000
					Capital	Stock	$9,900,000
						Retained Earnings	$1,150,000
					Stockholders Equity		$11,050,000
				Total Liabilities and Stockholders equity			$14,740,000

Question 2

Below is an Income Statement and Balance Sheet. Suppose $100,000 is spent on new office furniture with $20,000 paid on the furniture when received and $80,000 to be paid in 30 days. Which line items and totals would change, by how much would they change, and what would be the resulting values in the following Income statement and balance sheet ? To simplify this problem, assume that the furniture will not be depreciated. Show the answers in the following table. Some lines in the table below may not be needed.

Income Statement		Year x			Balance Sheet		Year x
Revenue		$15,000,000		Assets
	Returns, Credits, etc.	($5,000)			Current Assets
	Net Sales (Revenue)	$14,995,000				Cash	$80,000
Direct Costs						Accounts receivable	$90,000
	Labor	($4,000,000)				Finished Goods Inventory	$40,000
	Materials	($2,500,000)				Materials Inventory	$60,000
	Cost of Goods Sold (COGS)	($6,500,000)			Total Current Assets		$270,000
	Gross Margin	$8,495,000
Selling General and Admin.					Long term Assets
	Marketing	($1,250,000)				Buildings	$10,000,000
	Research and Development	($1,000,000)				Furniture	$3,000,000
	Administration	($750,000)				Other	$1,500,000
	Other	($500,000)			Total Fixed Assets		$14,500,000
	Depreciation	($250,000)		Total Assets			$14,770,000
	S G & A	($3,750,000)
Earnings Before Interest and Taxes (EBIT)		$4,745,000		Liabilities
	Interest Expense/Income	($165,000)			Current Liabilities
	Pre-tax Income	$4,580,000				Notes Payable	$100,000
	Income Tax @ 30%	($1,374,000)				Accounts Payable	$110,000
	Net Income	$3,206,000				Taxes Payable	$10,000
					Total Current Liabilities		$220,000
					Long Term Liabilities
						Bank Loans @ 6%	$500,000
	Current Stock Price	$28.00				Mortgage @ 4.5%	$3,000,000
	Current Outstanding Shares	600,000			Total Long Term Liabilities		$3,500,000
					Capital	Stock	$9,900,000
						Retained Earnings	$1,150,000
					Stockholders Equity		$11,050,000
				Total Liabilities and Stockholders equity			$14,770,000

Question 3

Geno's restaurant has monthly fixed costs of $40,000 for rent, utilities, and upkeep. The average profit per dinner customer is $15.00. They are open six days a week and they assume an average of 26 business days per month. Assume for this analysis that only dinner is served.

a How many dinners per month must Geno's serve to break even?

b Geno presently spends nothing on marketing. If Geno spent $30,000 on advertising a year, what would the breakeven number of dinners per month be then?

c Geno would like to change the prices to make it so 2,500 customers would cover all fixed costs including $30,000 annually for marketing. How much would the average profit per customer need to change?

Question 4

BTech, LLC, a startup biotechnology company is preparing alternative proposals for producing a new product in an existing building. In the proposal being considered in this question, the building will be renovated and equipped in one year. Production then will start in year 1. MACRS depreciation will be used with depreciation deductions starting in year 1. The renovation will require the purchase and installation of two types of assets labeled "Group 5" and "Group 7" because they can be depreciated using 5 year and 7 year MARCS rates respectively. The Group 5 assets will costs $300,000 and the Group 7 assets will cost $800,000. Table 9.3 on page 448 contains the depreciation rates. The planning time horizon is six years after renovation.

a Determine the depreciation and book value for each of the two investment groups for each year.

b Determine the gain/loss for tax purposes If the Group 5 and Group 7 assets are sold at the end of the planning period for a combined $500,000.

Question 5

RSTT, Inc. is looking at offering a new product. The sales of the new product are forecasted to be $900,000 in year 1 of the planning period, double in year 2, and increase by $50,000 each year thereafter. COGS for the new product are estimated at 50% of the revenue in year 1 and this percentage is reduced by 5% each year after year 1 (45% in year 2, 40% in year 3, etc.).

It is expected that sales of an existing product will be cannibalized (reduced) by $250,000 in year one and this reduction will increase by 20% per year for the remaining years in the planning period. For instance, the revenue reduction in year 2 is $250,000 +20% of this, or $300,000. The COGS for the existing product is a constant 40% of the Revenue for all years.

S.G.& A costs including depreciation are expected to be constant at $250,000 annually over the planning horizon for the new product. (e.g. you do not have to compute deprecation.) The tax rate is 15%. RSTT uses a MARR of 12%.

If the needed upfront investment would be $5 million, construct an incremental Income statement (no cash flow statement required) showing the effect on Net Earnings of the new product.

	Year	1	2	3	4	5
Revenue New product		$900,000	$1,800,000	$1,850,000	$1,900,000	$1,950,000
COGS % New Product		50%	45%	40%	35%	30%
COGS New Product		$450,000	$810,000	$740,000	$665,000	$585,000
Revenue decrease -Existing		($250,000)	($300,000)	($360,000)	($432,000)	($518,400)
COGS % Existing		40%	40%	40%	40%	40%
COGS reduction- Existing		$100,000	$120,000	$144,000	$172,800	$207,360
SG&A- all years	$250,000
Tax %	15%
Project time span	5	years

Question 6

Five Gals Ice Cream Store is looking at an automated machine that will serve ice cream in cones and cups directly to customers. It includes toppings as well. Customers would select their choices using an app on their phone, pay and then receive their treat untouched by human hands.

Revenue is expected to gradually increase - initially because of the novelty, and later because of the convenience.

Neither the prices for the cones and cups nor the volume sold are expected to change. Staffing costs would be greatly reduced, and utility costs would increase. No change in working capital is expected. Below is the pertinent data from an Income statement.
The automated machine can be purchased for $1,000,000 and could be sold at the end of year 4 for $300,000. A planning horizon of 4 years is being used to evaluate this proposal and the MARR is 16%.

a Prepare a cash flow statement for the Automated Ice Cream Store proposal based on the depreciation and Net Income taken from the income statement given below.

b Determine the internal rate of return.

c Determine the present worth.

d Based on the answers to parts a, b and c, should the machine be purchased?

Question 7

Solar Uninterruptible Nanoparticle (SUN) installs solar panels. SUN is evaluating a proposal that they lease the solar panels to customers as opposed to selling them.

The average annual maintenance cost for each installation is $150. The administrative costs for SUN are a fixed $250,000 annually. SUN purchases the panels from a manufacturer for $2,500 as needed. A forecast is that they could lease 10,000 installations in year 1 at a price of $1244 annually ($100 month compounded at 8% APR). After year 1, installations are expected to grow 20% annually. The planning horizon is 5 years.

Working capital requirements are for inventory only as each leased installation is considered as being in SUN's inventory. The inventory value of each solar installation is its purchase cost.

Although SUN will treat the solar panels as inventory rather than an investment in their financial statements, they would own the leased panels and therefore can depreciate these. They will do this using straight line depreciation over 5 years based on the cost of the unit and the total number of units they have installed . There is no salvage value for the solar panels.

SUN will borrow the funds for the investment in solar panels at a rate of 8%, which is used as the MARR. The tax rate for SUN is 14%.

The Income and cash flow statements are shown below. It is not your assignment to critique the Income and Cash flow statements as the CEO has developed and approved these. Your tasks are the following.

a How many customers will be needed in Year 0 to break even, measured by the present worth = 0, if the lease price per unit is $1,245?

b What leasing price would have to be charged to achieve a present worth of $1 million at a quantity of 10,000 customers for the first year?

Data Block
	Annual Lease Price	$1,245	each
	Year 1 quantity	10,000
	Annual % increase	20%
	Cost for each installation	$2,500
	Maintenance Costs	$150	annual
	Fixed Costs	$800,000	annually
	MARR	8%
	Tax Rate	14%
	Time span	5
	Salvage	$0
		1	2	3	4	5
	Quantity	10,000	12,000	14,400	17,280	20,736
	Total Units Installed	$10,000	$22,000	$36,400	$53,680	$74,416
	Lease Price each	$1,245	$1,245	$1,245	$1,245	$1,245
	Revenue	$12,450,000	$27,390,000	$45,318,000	$66,831,600	$92,647,920
	Inventory Value each	$2,500	$2,500	$2,500	$2,500	$2,500
	Total Inventory Value	$25,000,000	$55,000,000	$91,000,000	$134,200,000	$186,040,000
	Depreciation (SL over 5 years)	$5,000,000	$11,000,000	$18,200,000	$26,840,000	$37,208,000
Income Statement
		1	2	3	4	5
	Revenue	$12,450,000	$27,390,000	$45,318,000	$66,831,600	$92,647,920
	COGS	($1,500,000)	($3,300,000)	($5,460,000)	($8,052,000)	($11,162,400)
	Gross Profit	$10,950,000	$24,090,000	$39,858,000	$58,779,600	$81,485,520
	Fixed Costs	($800,000)	($800,000)	($800,000)	($800,000)	($800,000)
	Depreciation	($5,000,000)	($11,000,000)	($18,200,000)	($26,840,000)	($37,208,000)
	EBIT	$5,150,000	$12,290,000	$20,858,000	$31,139,600	$43,477,520
	Taxes	($412,000)	($983,200)	($1,668,640)	($2,491,168)	($3,478,202)
	Net Income	$4,738,000	$11,306,800	$19,189,360	$28,648,432	$39,999,318
Cash Flow
		1	2	3	4	5
	Net Income	$4,738,000	$11,306,800	$19,189,360	$28,648,432	$39,999,318
	Depreciation	$5,000,000	$11,000,000	$18,200,000	$26,840,000	$37,208,000
	Working Capital (Inventory) Change	($25,000,000)	($30,000,000)	($36,000,000)	($43,200,000)	($51,840,000)
	Cash Flow	($15,262,000)	($7,693,200)	$1,389,360	$12,288,432	$25,367,318
		'
	Present worth	$6,672,693

Question 8

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.

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. The sentence "The planning time horizon should consider the acquisition and preparation as being done in the current year and then for 20 years thereafter" is intended to mean that the acquisition and preparation will take one year - that is, the current year. Then use a 20 year planning horizon beyond that.

a Using a B-C method for evaluations, determine which ones should be chosen Explain your recommendation.

b Using a B/C method for evaluations, determine which ones should be chosen Explain your recommendation.

Site	Acquisition Cost	Preparation Cost	Annual Operating Cost	Annual  Benefits
1	$1.0	$3.2	$1.0	$3.0
2	$2.2	$2.3	$1.2	$2.5
3	$1.4	$0.8	$0.9	$2.0
4	$0.9	$0.7	$1.4	$3.2
5	$3.4	$3.1	$1.0	$1.0
6	$2.6	$1.4	$0.9	$1.4
7	$1.4	$1.6	$1.3	$1.5

Question 9

Archer Allison has just been appointed as the new CEO of Virta Corporation. The IT Company has had lackluster performance over the past three years and Archer was brought into to shake up the firm and get it going in the right direction for the future.

He has been presented the following four options by his CFO and his team of financial analysts. Review each and describe what impact you believe each one will have on the future performance of the firm. Discuss how TVOM factors in to each option. Please rank order the options from 1 to 4 in terms of impact on the financial performance of Virta.

1. Reduce the current $1.04 quarterly dividend by 50% and utilize the additional capital to improve the firm's organizational performance.

2. Buy back 1.2 Million common shares of Virta

3. Secure a $32 million dollar infusion of capital from an "Angel investor" for 10 years at 3%--the Company's current MARR is 8%.

4. Bring back to the US a manufacturing facility from Taiwan to South Carolina-the State tax incentive will net the firm $56 million over the next five years.