Posted: July 18th, 2022

Fill in the missing numbers in the following income statement

Sales $ 645,300

Costs 346,800

Depreciation 97,500

2. Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,520,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,290,000 in annual sales, with costs of $1,280,000. The project requires an initial investment in net working capital of $164,000, and the fixed asset will have a market value of $189,000 at the end of the project. Assume that the tax rate is 40 percent and the required return on the project is 7 percent.

Requirement 1:

What are the net cash flows of the project for the following years?

Requirement 2:

What is the NPV of the project?

3. Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $139,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $594,000 per year. The fixed costs associated with this will be $198,000 per year, and variable costs will amount to 18 percent of sales. The equipment necessary for production of the Potato Pet will cost $658,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy’s is in a 40 percent tax bracket and has a required return of 12 percent.

Required:

Calculate the Time 0 cash flow for this project.

Calculate the annual OCF for this project

Calculate the payback period for this project.

Calculate the NPV for this project

Calculate the IRR for this project

4.use the following returns for X and Y.

Returns

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Year X Y

1 22.8 % 29.4 %

2 – 17.8 – 4.8

3 10.8 31.4

4 21.6 – 16.6

5 5.8 35.4

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Requirement 1:

Average returns

Requirement 2:

Calculate the variances for X and Y.

Requirement 3:

Calculate the standard deviations for X and Y.

A stock has had the following year-end prices and dividends:

Year Price Dividend

1 $ 64.48 —

2 71.35 $ 0.63

3 77.15 0.68

4 63.42 0.74

5 73.41 0.83

6 81.25 0.90

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5. What are the arithmetic and geometric returns for the stock?

6. Rolston Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,000, and the company expects to sell 1,450 per year. The company currently sells 1,950 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,770 units per year. The old board retails for $21,900. Variable costs are 55 percent of sales, depreciation on the equipment to produce the new board will be $1,400,000 per year, and fixed costs are $1,300,000 per year.

Required:

If the tax rate is 38 percent, what is the annual OCF for the project?

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