FIN 711 University of Phoenix Financial Analysis Case Study

User Generated

uvyycrapr

Economics

FIN 711

University of Phoenix

FIN

Description

Unformatted Attachment Preview

FIN/711 v7 Financial Analysis and Case Study Custom Molds & Casting Company makes custom molds and fabricated parts for its customers. These molds are made to order and are used to make various products. Custom Molds & Casting also makes parts based on customer satisfaction. Custom Molds & Casting casts, fabricates, and machines these parts to the specifications of customers. The company has experienced an increase in business and this has led to its decision to purchase new equipment, which would involve capital expenditures. The equipment would cost $300,000, plus a shipping cost of $20,000 and $22,000 in installation fees. This equipment has an economic life of 4 years, and the company’s accounting department has noted that this equipment is classified for a MACRS 3-year class. The machinery is expected to have a salvage value of $15,000 after 4 years of use. The marketing department has provided the following 4-year sales forecast for the new products made from this equipment. The price and the cost per unit is given below: Four Year Sales Forecast Description Year 1 Year 2 Year 3 Year 4 Units 1,500 1,575 1,605 1,626 Sales Price per Unit $240 $252 $264 $276 Unit Cost $100 $105 $110 $115 The sales price and cost are expected to increase by 4.8% per year due to inflation. Further, to handle the new line, the firm’s net working capital would have to increase by an amount equal to 12% of sales revenues. The firm’s tax rate is 42%, and its overall weighted average cost of capital is 12.8%. Equipment Cost $300,000 Shipping Charge $20,000 Installation Charge $22,000 Economic Life 4 Salvage Value $15,000 Tax Rate 42.0% Copyright 2020 by University of Phoenix. All rights reserved. Financial Analysis and Case Study FIN/711 v7 Page 2 of 2 Cost of Capital 12.8% Net Working Capital/Sales 12.0% Depreciable Basis = Equipment + Freight + Installation Depreciable Basis = $342,000 Depreciation (% x Basis) Remaining Book Value Year % Basis 1 0.3333 $342,000 $113,989 $228,011 2 0.4445 $342,000 $152,019 $75,992 3 0.1481 $342,000 $50,650 $25,342 4 0.0741 $342,000 $25,342 $0 Write a 1,050 to 1,400-word analysis in which you do the following: • • • • • • Construct annual incremental operating cash flow statements for the next 4 years. Calculate the net present value (NPV) based on your projected cash flows. Provide rationale explaining why Custom Molds & Casting Company should purchase this equipment. Discuss what other factors you need to consider in your decision. Conduct a sensitivity analysis. Assume that the new product line is expected to decrease sales of the firm’s other lines by $50,000 per year. Should this be considered in the analysis? Why or why not? If so, how? Submit your assignment. Copyright 2020 by University of Phoenix. All rights reserved.
Purchase answer to see full attachment
Explanation & Answer:
1000 words
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

View attached explanation and answer. Let me know if you have any questions.

FINANCIAL ANALYSIS AND CASE STUDY

Financial Analysis and Case Study

Student Name
Course Name
Institution
Professor’s Name
Date

1

FINANCIAL ANALYSIS AND CASE STUDY

2
Financial Analysis and Case Study

Construct annual incremental operating cash flow statements for the next four years.
Qn
1

Operating Cash Flows
Particulars
Initial Investment
Sales Units
Sales price per unit
Cost per unit

Year 0
$
(342,000.00)

Year 1

Year 2

1,500

Year 3

1,575

Year 4

1,605

1,626

$

240.00

$

252.00

$

264.00

$

276.00

$

100.00

$

105.00

$

110.00

$

115.00

Revenue from Sales

$

360,000.00

$

396,900.00

$

423,720.00

Total Costs

$

150,000.00

$

165,375.00

$

176,550.00

Operating Profit
Less:
Depreciation

$

210,000.00

$

231,525.00

$

247,170.00

$

113,989.00

$

152,019.00

$

50,650.00

EBIT
Tax Provision

$
$

96,011.00
40,324.62

$
$

79,506.00
33,392.52

$
$

196,520.00
82,538.40

EAT
Add:
Depreciation

$

55,686.38

$

46,113.48

$

113,981.60

$

113,989.00

$

152,019.00

$

50,650.00

Cash Flow
Less:

$

169,675.38

$

198,132.48

$

164,631.60

$
448,776.00
$
186,990.00
$
261,786.00
$
25,342.00
$
236,444.00
$
99,306.48
$
137,137.52
$
25,342.00
$
162,479.52

FINANCIAL ANALYSIS AND CASE STUDY
Increase in WC
Add Salvage Value
Operating Cash Flows

3

$
$
(342,000.00)

43,200.00

$
126,475.38

$

47,628.00

$
150,504.48

$

50,846.40

$
113,785.20

$
53,853.12
$
15,000.00
$
123,626.40

Calculate the net present value (NPV) based on the projected cash flows.
Qn 2

Net Present Value

Year
0
1
2
3
4

Operating Cash Flows
$ (342,000.00)
$
126,475.38
$
150,504.48
$
113,785.20
$
123,626.40

Discounting
Factor
1
0.886524823
0.785926261
0.696743139
0.617680088
Net Present Value

Discounted Cash Flow
$ (342,000.00)
$
112,123.56
$
118,285.42
$
79,279.06
$
76,361.57
$
44,049.61

Conduct a sensitivity analysis.

Qn4

Sensitivity Analysis
(Sales Reduction by
50,000)

Revenue from Sales

$

310,000.00

$

346,900.00

$

373,720.00

Total Costs

$

150,000.00

$

165,375.00

$

176,550.00

Operating Profit

$

160,000.00

$

181,525.00

$

197,170.00

$
398,776.00
$
1...

Related Tags