Question 1) Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $12 million, of which 75% has been depreciated. The used equipment can be sold today for $4 million, and its tax rate is 40%. What is the equipment's after-tax net salvage value?
Question 2) Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The firm's WACC is 10%, and its marginal tax rate is 35%. Should Chen buy the new machine?
Question 3) The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,080,000, and it would cost another $22,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $605,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $15,500. The sprayer would not change revenues, but it is expected to save the firm $380,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.
a. What is the Year 0 net cash flow?
b. What are the net operating cash flows in Years 1, 2, and 3?
c. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)?
d. Based on your IRR analysis, if the project's cost of capital is 12%, should the machine be purchased?
Question 4) Broussard Skateboard's sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $5 million at the end of 2013. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted payout ratio is 40%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year.
Question 5) Stevens Textiles's 2013 financial statements are shown here:
Balance Sheet as of December 31, 2013 (Thousands of Dollars)
Cash mce_markernbsp; 1,080 Accounts payable mce_markernbsp; 4,320
Receivables 6,480 Accruals 2,880
Inventories 9,000 Line of credit 0
Total current assets $16,560 Notes payable 2,100
Net fixed assets 12,600 Total current liabilities mce_markernbsp; 9,300
Mortgage bonds 3,500
Common stock 3,500
______Retained earnings 12,860
Total assets $29,160 Total liabilities and equity $ 29,160
Income Statement for December 31, 2013 (Thousands of Dollars)
Sales $36,000
Operating costs 32,440
Earnings before interest and taxes mce_markernbsp; 3,560
Interest 460
Pre-tax earnings $ 3,100
Taxes (40%) 1,240
Net income $ 1,860
Dividends (45%) mce_markernbsp; 837
Addition to retained earnings $ 1,023
a. Suppose 2014 sales are projected to increase by 15% over 2013 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2014. The interest rate on all debt is 10%, and cash earns no interest income. Assume that all additional debt in the form of a line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings.
Assume that the company was operating at full capacity in 2013, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the additional funds needed.
b. What is the resulting total forecasted amount of the line of credit?