Question

Comprehensive/Spreadsheet Problem 12-18 NEW PROJECT ANALYSIS You must analyze a potential new product-a caulking com- pound that Cory Materials' R&D people developed for use in the residential construction industry Cory's marketing manager thinks the company can sell 115,000 tubes per year at a price of $3.25 each for 3 years, after which the product will be obsolete. The purchase price of the required equipment, including shipping and installation costs, is $175,000, and the equipment is eligible for 100% bonus depreciation at the time of purchase. Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payable and accruals) would rise by $15,000. Variable cost per unit is $1.95, and fixed costs would be $70,000 per year. When production ceases after 3 years, the equip- ment should have a market value of $15,000. Cory's tax rate is 25%, and it uses a 10% WACC for average-risk projects. a. Find the required Year O investment outlay after bonus depreciation is considered and the project's annual cash flows. Then calculate the project's NPV, IRR, MIRR, and pay- back. Assume at this point that the project is of average risk. b. Suppose you now leam that R&D costs for the new product were $30,000 and that those costs were incurred and expensed for tax purposes last year. How would this affect your estimate of NPV and the other profitability measures? c. If the new project would reduce cash flows from Cory's other projects and if the new project would be housed in an empty building that Cory owns and could sell, how would those factors affect the project's NPV? d. Are this project's cash flows likely to be positively or negatively correlated with returns on Cory's other projects and with the economy, and should this matter in your analysis? Explain. e. Spreadsheet assignment: at instructor's option Construct a spreadsheet that calculates the cash flows, NPV, IRR, payback, and MIRR. f. The CEO expressed concern that some of the base-case inputs for the caulking com- pound might be too optimistic or too pessimistic, and he wants to know how the NPV would be affected if these six variables were 20% above or 20% below the base-case levels: unit sales, sales price, variable cost, fixed costs, WACC, and equipment cost. Hold other things constant when you consider each variable and construct a sensitivi- ty graph to illustrate your results. dis whole or in part. WCN 02-200-202 Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned or CC All Media

Answer 1

		CASH FLOW IN YEAR 0
	a	Cost of equipment	($175,000)
	b	Depreciation tax shield =175000*25%	$43,750
	c	Increase in current assets	($35,000)
	d	Increase in current liabilities	$15,000
	e=a+b+c+d	Cash Flow in Year 0	($151,250)
		Cash Flow in Year 1 and 2:
	f	Sales Revenue=115000*3.25	$373,750
	g	Variable costs =115000*1,95	-$224,250
	h	Fixed costs	($70,000)
	j=f+g+h	Before tax profit	$79,500
	k=j*25%	Tax expense	-$19,875
	l=j-k	After tax profit	$59,625
		Cash flow in year 1 and2	$59,625
		Before tax salvage value	$15,000
		After tax salvage Value	$11,250	15000*(1-0.25)
		Cash Flow in Year 3=59625+11250	$70,875
		Present Value of Cash Flow =(Cash Flow)/((1+i)^N)
		i=discount rate =WACC=10%=0.1
		N=Year of Cash Flow
			N	CF	PV=CF/(1.1^N)
			Year	Cash Flow	Present Value	Cumulative Cash Flow
			0	($151,250)	($151,250)	($151,250)
			1	$59,625	$54,205	($91,625)
			2	$59,625	$49,277	($32,000)
			3	$70,875	$53,249	$38,875
				SUM	$5,481
		Net Present Value (NPV)=Sum of PV	$5,481
		Payback Period=Period in which Cumulative Cash Flow=NIL
		Payback Period=2+(32000/53249)	2.60	Years
		Internal Rate of Return (IRR)	12.0%	(Using IRR function of excel over Cash Flow)
		ModifiedInternal Rate of Return (MIRR)	11.3%	(Using MIRR function of excel over Cash Flow)
								спрага 19 Algiment F36 =IRR(G28:G31) G H I J 15 k=j*25% 16 I=j-k Tax expense After tax profit Cash flow in year 1 and2 F -$19,875 $59,625 $59,625 Before tax salvage value After tax salvage Value Cash Flow in Year 3=59625+11250 $15,000 $11,250 15000*(1-0.25) $70,875 Present Value of Cash Flow =(Cash Flow)/((1+i)^N) i=discount rate =WACC=10%=0.1 N=Year of Cash Flow CF PV=CF/(1.1^N) Cumulative Year Cash Flow Present Value Cash Flow 0 ($151,250) ($151,250) ($151,250) 1 $59,625 $54,205 ($91,625) 2 $59,625 $49,277 ($32,000) 3 $70,875 $53,249 $38,875 SUM $5,481 Net Present Value (NPV)=Sum of PV $5,481 Payback Period=Period in which Cumulative Cash Flow=NIL Payback Period=2+(32000/53249) 2.60 Years Internal Rate of Return (IRR) 12.0% (Using IRR function of excel over Cash Flow) Clipboard Font Alignment Number Style: - X Fax G H I D 15 k=j*25% 16 I=j-k Tax expense After tax profit Cash flow in year 1 and2 =MIRR(G28:G31,10%,10%) F -$19,875 $59,625 $59,625 Before tax salvage value After tax salvage Value Cash Flow in Year 3=59625+11250 $15,000 $11,250 15000*(1-0.25) $70,875 N Present Value of Cash Flow =(Cash Flow)/((1+i)^N) i=discount rate =WACC=10%=0.1 N=Year of Cash Flow CF P V=CF/(1.1^N) Cumulative Year Cash Flow Present Value Cash Flow 0 ($151,250) ($151,250) ($151,250) 1 $59,625 $54,205 ($91,625) 2 $59,625 $49,277 ($32,000) 3 $70,875 $53,249 $38,875 SUM $5,481 Net Present Value (NPV)=Sum of PV $5,481 Payback Period=Period in which Cumulative Cash Flow=NIL Payback Period=2+(32000/53249) 2.60 Years Internal Rate of Return (IRR) 12.0% (Using IRR function of excel over Cash Flow) ModifiedInternal Rate of Return (MIRR 11.3%! (Using MIRR function of excel over Cash Flow)