Group Project #1 - Business Finance

xlsx

School

Edison State Community College *

*We aren’t endorsed by this school

Course

229

Subject

Finance

Date

Jan 9, 2024

Type

xlsx

Pages

Uploaded by EarlUniverseZebra32

Welcome to TMV Comprehensive Project Chapter 5, 8, & 11 Concepts and Practices Table of Contents: Red Tab: Narrative of the Project Scope Green Tabs:Student Tabs to Insert Your Work. Instructions: Review the Project within the red tab in the workbook Work problems within the green tabs in this workbooks Save this workbook using your last name in the title of the file Submit your work via the Blackboard Assignment folder

Project Evaluation and Risk Analysis The following information was included on the initial requisition: Often the purchase price does not include all ancillary expenses that are necessary for installation of the equipment and mus Part of your responsibility is to research these additional costs and make sure they are included in the requisition. - Equipment will be depreciated using the Straight-line method. - Equipment has an economic life of 5 years. - Equipment expected to have zero salvage value at the end of year 5. At that time the equipment will be obsolete and sold Project Evaluation (Total 100 points) The company follows an evaluation method called ROCE (return on capital employed) which is a two-part method: Part 1. NPV & IRR (25 points) a) Calculate the net present value (NPV) using the information above. Use the NPV tab in this spreadsheet for your calculati b) Based on the NPV calculation is the return acceptable? Please explain your conclusion. Part 2. Risk Assessment (25 points) a) Review the "Risk Assessment" tab which includes economic data provided by the Bureau of Economic Analysis (BEA) Note: Possible economic conditions and their probabilities are as follows. Possible recession, .05, slow growth, .05, norm b) Calculate weighted return, return deviation, squared return deviation, weighted squared deviation, variance, mean and Reassessment of NPV & IRR (25 points) a) A fixed asset suspension account, Account 99999, was established in the "General Ledger Accounts" to accumulate all ex Review of this account (See G/L for Balance) indicates actual expenditures exceeded the approved amount of $150,000, b) Recalulate the NPV & IRR based on the actual expenditures (cash flow investment amount) - See "Revisit NPV & IRR" tab c) Given your "new" recalculated NPV & IRR, would you still accept this project? Record Acquisition of Asset (25 points) a) Prepare a journal entry to transfer the suspense account balance to the machinery and equipment account. b) Post the journal entry into the General Ledger Account(s) and establish as new balance in the affected accounts. c) Place asset into service, and assign fixed asset #200 to the asset. Companies will now physicaly affix a fixed tag to the a d) Record the information in the fixed asset management system by completing the Company's Fixed Asset Record. Tip: Date soap press is placed in service is February 1st. Include other relevant information. Do not calculate the depre Investment Opportunity : Manufacturing management wants to acquire new soap pressing equipment to support current prod Proposed capital investments are included in the annual budget. This includes the estimated cost of acquisition and the month approval process begins. As a member of the accounting and finance department your responsibilities include evaluation of p . Purchase Price: Estimated purchase price for the new equipment is $150 million. The investment will be made immediately . Company’s Depreciation Policy: . Cash Inflows : Based on your analysis project inflows are expected to be $65 million per year, beginning one year after installa . Cash Outflows : The new equipment will have extra cash outflows of $10 million per year beginning one year from today. . Tax Rate : The company’s estimated tax rate is 30%. . Required Return : The company will only invest in projects that yield a return it feels could be earned from other investment c) After completing the risk analysis do you still agree with your conclusion in Part 1, b.? If so why?

NPV & IRR Find the net present value (NPV) and (IRR) using the information in the "Project Scope" tab. Use the cells below to show your work. Calculate NPV & IRR Calculate Cash Flow Rate of Return 17% Inflow 65,000,000 Yr 0 (150,000,000) Outflow (10,000,000) Yr 1 47,500,000 Depreciation (30,000,000) Yr 2 47,500,000 25,000,000 Yr 3 47,500,000 Tax (1-.30) 17,500,000 Yr 4 47,500,000 Depreciation 30,000,000 Yr 5 47,500,000 Cash Flow 47,500,000 NPV 1,968,943 IRR 17.6% Based on the NPV calculation and the IRR is the return acceptable? Please explain your conclusion. After these calculations I would accept this project since the NPV is positive and the IRR is above the return rate required.

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Part 2: RISK ASSESSMENT Find the Weighted Return, Return Deviation, Squared Return Deviation, Weighted Squared Deviation, Variance, Mean and Standard Deviation. Use the cells below to show your work. (R-(R*P)) (R-(R*P)) * P (R*P) R-(R*P) Squared Weighted Economic (R) (P) Weighted Return Return Squared Status Return Probability Return Deviation Deviation Deviation Recession -10% 0.05 -0.0050 -0.0950 0.00903 0.000451 Slow Growth 5% 0.05 0.0025 0.0475 0.002256 0.000113 Normal Growth 17% 0.90 0.1530 0.0170 0.000289 0.000260 Expected Value - Mean 15.05% Variance 0.000824 Standard deviation 0.028708 After completing the risk analysis do you still agree with your conclusion in Part 1, b? If so why? The Risk analysis shows us that the average return rate is only 15% which is BELOW our required rate of return of 17%, because of this I would believe that the project would be more of a risk after-all. 2 2

Part 1: NPV & IRR Recalulate the NPV & IRR based on the actual expenditures (cash flow investment) Use the cells below to show your work. Calculate NPV & IRR Recalculated: Rate of Return 17% Yr 0 (165,000,000) Inflow 65,000,000 Yr 1 48,400,000 Outflow (10,000,000) Yr 2 48,400,000 Depreciation (33,000,000) Yr 3 48,400,000 22,000,000 Yr 4 48,400,000 Tax (1-.30) 15,400,000 Yr 5 48,400,000 Depreciation 33,000,000 NPV ($10,151,646) Cash Flow 48,400,000 IRR 14.3% Given your "new" recalculated NPV & IRR, would you still accept this project? Please explain your conclusion. Calculate Cash Flow With the "real" calculated NPV and IRR this project is not worth it and would not end up being profitable to the company due to those extra hidden costs. Also, the IRR is now below the required rate of return of 17%.

Date Accounts and Explanation PR Debit Credit 1-Jan Machinery and Equipment -10020 165,000,000 Fixed Asset Suspension-Soap Press - 99999 165,000,000 transfer the suspense account balance to the machinery and equipment account.

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Fixed Asset Suspension-Soap Press - 99999 Accounts Payable - 20001 Beg Bal - Beg Bal - 130,000,000 165,000,000 1-Jan 130,000,000 20,000,000 20,000,000 15,000,000 15,000,000 Bal - 165,000,000 Bal Machinery and Equipment - 10020 Beg Bal 0 1-Jan 165,000,000 Bal 165,000,000 Depreciation Expense - 40040 Accumulated Depreciation - 11020

Fixed Asset Record With Depreciation Date: Asset Name Asset No. Date In Service Salvage Value Soap Press 200 2/1/2023 165,000,000 SL 5 - 165,000,000 Total Abbreviation Depreciation Method SL Straight-line depreciation 150% DDB 200% DDB Acquisition Cost Depreciation Method Useful Life (Years) Depreciation Expense Account Number-40040 Accumulated Depreciation Account Number-11020 Book Value of Fixed Asset 150% declining balance depreciation 200% declining balance depreciation