Quiz 1
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Temple University *
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Subject
Finance
Date
Feb 20, 2024
Type
xlsx
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16
Uploaded by MateMetal15125
FIN 3512 – FALL 2023
QUIZ #1
Lion Corp. is a manufacturer of smart phone batteries. It is upgrading the machinery for its GEN4 b
You are a financial analyst in Lion’s Financial Planning and Analysis Department. You have been ask
which will be part of the presentation made to Lion’s Capital Projects Committee to obtain approva
The following are the assumptions developed by the sales and production departments which shou
1) net present value, 2) internal rate of return, 3) payback and 4) profitability index. The analysis sh
this new battery technology will be obsolete and the industry will be transitioning to the newest te
Working capital assumptions
Other
Lease vs. Buy
For the committee you are to determine if it is more economical to lease or buy the production ma
Lion’s incremental borrowing rate is 7.0%. The production machinery can be leased for 7 years at $
MACRS Depreciation rates
* New production machinery purchases:
o $28,500,000 – 5 year MACRS tax life
* Pricing and volume projections for GEN4:
o $28.00 per battery in year 1 with 3% annual price increases through year 8
o 1,500,000 units sold in year 1 and increases of 5% in years 2 – 5, a 15% decrease in year
o Cost of goods sold:
§ Materials cost of $11.50 per battery in year 1 and will increase 2% per year § Manufacturing labor and overhead expense is expected to be 35% of revenue
o Selling, general and administrative expenses will be 8.0% of revenue
* Initial working capital investment of $1,000,000 which will be recovered in year 8. Working ca
* Average tax rate is 23% and the marginal tax rate 25%
* Required rate of return for project is 1% above Lion’s WACC
* Lion’s WACC is 12.0%
battery manufacturing line which will allow it to sell the next generation battery to its smart phone customers, ked to a develop a capital project analysis
al to move forward with the machinery upgrade.
uld be used to prepare a capital project analysis. The committee will want to see the following analyses: hould be prepared over an eight-year period. It is assumed by the end of eight years
echnology.
achinery. $460,000 per month and can be purchased at the end of the lease for $500,000.
r 6, a 30% decrease in year 7 and a 50% decrease in year 8.
apital investments of $500,000 in each of years 1 – 7.
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Apple and Samsung.
93749
FIN 3512 - QUIZ #1 - September, 2023
Be sure to use formulas in Cash Flow Projection section linking to Assumptions Section
Lion Corp.
CASH FLOW PROJECTION
Period 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Revenue
$ 42,000,000 $ 45,423,000 $ 49,124,975 $ 53,128,660 $ 57,458,646 $ 50,305,044 $ 36,269,937 $ 18,679,018 Cost of goods sold
Material costs
17,250,000 18,655,875 20,176,329 21,820,700 23,599,087 20,661,000 14,896,581 7,671,739 Manufacturing labor & overhead
14,700,000 15,898,050 17,193,741 18,595,031 20,110,526 17,606,766 12,694,478 6,537,656 Total Cost of Goods Sold
31,950,000 34,553,925 37,370,070 40,415,731 43,709,613 38,267,766 27,591,059 14,209,395 Gross Profit
10,050,000 10,869,075 11,754,905 12,712,929 13,749,033 12,037,278 8,678,878 4,469,622 Gross Profit %
23.9%
23.9%
23.9%
23.9%
23.9%
23.9%
23.9%
23.9%
Depreciation expense (from depreciation schedule)
5,700,000 9,120,000 5,472,000 3,283,200 3,283,200 1,641,600 - - Selling, general & Admin expenses
3,360,000 3,633,840 3,929,998 4,250,293 4,596,692 4,024,404 2,901,595 1,494,321 Pre-Tax Income/(Loss)
990,000 (1,884,765) 2,352,907 5,179,437 5,869,141 6,371,275 5,777,283 2,975,301 Income Tax Expense/(Savings)
247,500 (471,191) 588,227 1,294,859 1,467,285 1,592,819 1,444,321 743,825 After-Tax Income/(Loss)
742,500 (1,413,574) 1,764,680 3,884,577 4,401,856 4,778,456 4,332,962 2,231,475 Depreciation
5,700,000 9,120,000 5,472,000 3,283,200 3,283,200 1,641,600 - - Increment Working Capital
500,000 500,000 500,000 500,000 500,000 500,000 500,000 (1,000,000)
Project Cash Flow
$ (28,500,000)
$ 5,942,500 $ 7,206,426 $ 6,736,680 $ 6,667,777 $ 7,185,056 $ 5,920,056 $ 3,832,962 $ 3,231,475 Cumulative cash flow
$ 5,942,500 $ 13,148,926 $ 19,885,606 $ 26,553,384 $ 33,738,440 $ 39,658,496 $ 43,491,458 $ 46,722,933 NPV
$748,934 5,238,440 OCF in year 5 not needed
IRR
13.8%
0.73 Percentage not needed
Payback period
4.27 0.27 Percentage needed
Profitability index
1.03 plus first 5 years
ASSUMPTIONS SECTION
Price per unit
$ 28.00 $ 28.84 $ 29.71 $ 30.60 $ 31.51 $ 32.46 $ 33.43 $ 34.44 Annual price increase
n/a
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
Units sold
1,500,000 1,575,000 1,653,750 1,736,438 1,823,259 1,549,770 1,084,839 542,420 Units sold annual growth rate
n/a
5.0%
5.0%
5.0%
5.0%
-15.0%
-30.0%
-50.0%
Cost of Goods Sold:
Material cost per battery
$ 11.50 $ 11.85 $ 12.20 $ 12.57 $ 12.94 $ 13.33 $ 13.73 $ 14.14 Annual material cost increase
n/a
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
Manufacturing labor and overhead as a % of revenue
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
35.0%
Selling, general & admin expense as a % of revenue
8.0%
8.0%
8.0%
8.0%
8.0%
8.0%
8.0%
8.0%
Tax Rate
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
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Annual working capital investment/Year 8 recovery
$ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 1,000,000 Initial working capital investment
$ (1,000,000)
Required Rate of Return
13.0%
FIN 3512 - QUIZ #1 - September, 2023
Lion Corp.
MACRS Depreciation Schedule
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Capital Expenditures
Manufacturing equipment (5 year MACRS)
28,500,000 Depreciation MACRS rates
5 year MACRS rates
20.00%
32.00%
19.20%
11.52%
11.52%
5.76%
Depreciation expense
5 year property
$ 5,700,000 $ 9,120,000 $ 5,472,000 $ 3,283,200 $ 3,283,200 $ 1,641,600
FIN 3512 - QUIZ #1 - September, 2023
Buy Analysis
MACRS Rates
1
20.00%
Machinery Total Cost
$ 28,500,000 2
32.00%
Lion's incremental Borrowing rate
7.0%
3
19.20%
Marginal tax rate
25.0%
4
11.52%
5
11.52%
6
5.76%
NPV $ (22,416,004)
months
Depreciation
Cash Flow
0
$ (28,500,000)
1
$ 475,000 $ 118,750 2
$ 475,000 $ 118,750 3
$ 475,000 $ 118,750 4
$ 475,000 $ 118,750 5
$ 475,000 $ 118,750 6
$ 475,000 $ 118,750 7
$ 475,000 $ 118,750 8
$ 475,000 $ 118,750 9
$ 475,000 $ 118,750 10
$ 475,000 $ 118,750 11
$ 475,000 $ 118,750
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12
$ 475,000 $ 118,750 13
760,000 $ 190,000 14
760,000 $ 190,000 15
760,000 $ 190,000 16
760,000 $ 190,000 17
760,000 $ 190,000 18
760,000 $ 190,000 19
760,000 $ 190,000 20
760,000 $ 190,000 21
760,000 $ 190,000 22
760,000 $ 190,000 23
760,000 $ 190,000 24
760,000 $ 190,000 25
456,000 $ 114,000 26
456,000 $ 114,000 27
456,000 $ 114,000 28
456,000 $ 114,000 29
456,000 $ 114,000 30
456,000 $ 114,000 31
456,000 $ 114,000 32
456,000 $ 114,000 33
456,000 $ 114,000 34
456,000 $ 114,000 35
456,000 $ 114,000
36
456,000 $ 114,000 37
273,600 $ 68,400 38
273,600 $ 68,400 39
273,600 $ 68,400 40
273,600 $ 68,400 41
273,600 $ 68,400 42
273,600 $ 68,400 43
273,600 $ 68,400 44
273,600 $ 68,400 45
273,600 $ 68,400 46
273,600 $ 68,400 47
273,600 $ 68,400 48
273,600 $ 68,400 49
273,600 $ 68,400 50
273,600 $ 68,400 51
273,600 $ 68,400 52
273,600 $ 68,400 53
273,600 $ 68,400 54
273,600 $ 68,400 55
273,600 $ 68,400 56
273,600 $ 68,400 57
273,600 $ 68,400 58
273,600 $ 68,400 59
273,600 $ 68,400
60
273,600 $ 68,400 61
136,800 $ 34,200 62
136,800 $ 34,200 63
136,800 $ 34,200 64
136,800 $ 34,200 65
136,800 $ 34,200 66
136,800 $ 34,200 67
136,800 $ 34,200 68
136,800 $ 34,200 69
136,800 $ 34,200 70
136,800 $ 34,200 71
136,800 $ 34,200 72
136,800 $ 34,200
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FIN 3512 - QUIZ #1 - September, 2023
Lease Analysis
Monthly lease rate
$ 460,000 Buyout end of lease (year 8)
$ 500,000 Lion's incremental Borrowing rate
7.0%
Incremental tax rate
25.0%
NPV $ (23,165,513)
months
Lease payment
Tax Savings
After-Tax
Buyout
Cash Flow
1
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
2
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
3
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
4
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
5
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
6
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
7
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
8
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
9
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
10
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
11
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
12
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
13
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
14
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
15
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
16
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
17
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
18
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
19
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
20
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
21
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
22
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
23
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
24
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
25
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
26
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
27
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
28
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
29
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
30
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
31
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
32
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
33
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
34
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
35
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
36
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
37
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
38
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
39
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
40
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
41
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
42
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
43
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
44
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
45
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
46
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
47
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
48
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
49
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
50
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
51
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
52
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
53
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
54
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
55
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
56
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
57
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
58
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
59
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
60
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
61
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
62
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
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63
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
64
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
65
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
66
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
67
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
68
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
69
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
70
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
71
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
72
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
73
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
74
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
75
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
76
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
77
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
78
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
79
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
80
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
81
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
82
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
83
$ (460,000) $ 115,000 $ (345,000)
$ (345,000)
84
$ (460,000) $ 115,000 $ (345,000) $ (500,000) $ (845,000)
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