FIN 251 Ch. 10 HW

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University of Scranton *

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Feb 20, 2024

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Calculating Projected Net Income and Oper. Cash Flow 1.) Projected Sales $635,000 2.) Calculating OCF Variable Costs (%) 44% VC ($) $279,400 a.) Top Down Fixed Costs $193,000 Sales Depreciation $54,000 Cash Costs EBIT $108,600 Taxes Taxes 35% $38,010 Operating Cash flow Net Income $70,590 b.) Bottom Up Net Income Depreciation Operating Cash flow Table of Contents 1.) A proposed new investment has projected sales of $635,000. Variable costs are 44% of s Depreciation is $54,000 per year. Prepare a Pro-Forma income statement assuming a tax rat Income? 2.) a.) What is the Operational Cash Flow using the Top Down Approach? b.) Bottom Up Approach?

n Approach $635,000 $472,400 $38,010 $124,590 p Approach $70,590 $54,000 $124,590 sales and fixed costs are $193,000. te of 35%. What is the projected Net

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OCF from Several Approaches OCF Using 3 Different Approaches 3. The Top Down Approach 4. The Bottom Up Approach Sales 160,000 Net Income 32,340 Cash Expenses 86,000 Depreciation 25,000 Depreciation 25,000 EBIT 49,000 OCF $57,340 Taxes 16,660 OCF $57,340 Table of Contents A proposed new project has projected sales of $160,000, cost of $86,000. Th $100,000 that will be deprciated straight line to 0 over four years. The tax rat three different approaches 3.) Top Down 4.) Bottom Up 5.) Tax Shield Approach

5. The Tax Shield Approach Sales 160,000 Cash Expenses 86,000 Gross Profit 74,000 Taxes 48,840 EBIT 49,000 Depreciation Tax Shield Depreciation Exp 25,000 Tax Rate 34% Tax Shield 8500 OCF $57,340 he initial investment is te is 34%. Calculate OCF using

Calculating Salvage Value Asset Cost $730,000 Tax Rate 40.00% Year Depreciation End of Year BV 1 91,250 638,750 2 91,250 547,500 3 91,250 456,250 4 91,250 365,000 5 91,250 273,750 6 91,250 182,500 7 91,250 91,250 8 91,250 0 Table of Contents 6.) Consider an asset that costs $730,000 and is depreciated straight lin over its eight year tax life. The asset is to be used in a five year project end of the project the asset can be sold for $192,000. If the relevant ta 40%, what is the after tax cash flow from the sale of this asset?

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Sale Price in Year 5 $192,000 BV in Year 5 $273,750 Loss on Sale $81,750 Tax Benefit from Loss $32,700 After Tax Asset Sale $224,700 ne to zero t. At the ax rate is

Calculating Project OCF-> NPV Initial Cost $2,500,000 9.) OCF Depreciation (S/L) $5 Bottom Up Dep Per Year $500,000 Sales $2,405,000 Cost $1,015,000 Projected Sales $2,405,000 Depreciation $500,000 Costs $1,015,000 EBIT $890,000 Tax Rate 38.0% Tax $338,200 Net Income $551,800 Dep Per Year $500,000 OCF $1,051,800 Table of Contents 7.) Royal Inc. is considering a new 3 year expansion project that requires an initial fixed asset investment of $2.5 million. The fixed asset will depreciate straight line to zero over its 5 year life, after which it will be worthless. The project is estimated to generate $2,405,000 in annual sales, with costs of $1,015,000. If the tax rate is 38%, what is the OCF for this project?

12.0% 0 1 2 3 CF -$2,500,000 $1,051,800 $1,051,800 $1,051,800 NPV $26,246.13 IRR 12.61% NWC $200,000 0 1 2 3 CF -$2,500,000 $1,051,800 $1,051,800 $1,051,800 NWC -$200,000 $200,000 Total CF -$2,700,000 $1,051,800 $1,051,800 $1,251,800 NPV -$31,397.82 12% 8.) Suppose the required return in the project is 12%. What is the projects NPV and IRR? 9.) Suppose the Project requires an initial Working Capital of $200,000?

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Inputs Start Up $50,000 Pro-Forma Dep Years 5 Projected Number of Units Sold Dep Per Year $10,000 Sales Price per Unit Fixed Cost $10,000 Total Sales Sales Price (per T-Shirt) $13.00 Variable Cost (Per -T-Shirt) $8.00 Variable Cost per unit Projected Number of Units Sold 10000 Total VC Tax Rate 33% Net Working Capital $5,000 Gross Profit Required Return 20% Fixed Cost per year Depreciation Earnings Before Interest/Taxes Taxes Net Income Table of Contents You are thinking about starting a T-Shirt business and have estim inputs below. Create a Pro-Forma Net Income Statement Calculate Operatioanl Cash Flow Calculate an NPV and IRR Analysis Calculate Payback and Discounted Payback

Operating CF NPV A 10,000 0 1 $13.00 NI $20,100 Startup -$50,000 $30,100 $130,000 Depr $10,000 NWC -$5,000 $30,100 Total CF -$55,000 $30,100 $8 $80,000 NPV $11,299 $50,000 $10,000 $10,000 $30,000 $9,900 $20,100 mated the following

Analysis IRR Payback 2 3 IRR 32% Cash Flows Total CF $30,100 $30,100 0 -$55,000 -$55,000 $5,000 1 $30,100 -$24,900 $30,100 $35,100 2 $30,100 $5,200 3 $35,100 $40,300 Payback 1.83

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Required Return 15% Discounted Cash Flow Cash Flows Discounted CF Total CF 0 -$55,000 -$55,000 -$55,000 1 $30,100 $26,174 -$28,826 2 $30,100 $22,760 -$6,066 3 $35,100 $23,079 $17,013 Disc PB 2.26