P4_Final_Mills_Calculation(Corrected)_11.28.2023
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School
University of Maryland Global Campus (UMGC) *
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Course
620
Subject
Finance
Date
Jan 9, 2024
Type
xlsx
Pages
16
Uploaded by lakyam57
Instructions
Answer all questions in this workbook. Be sure to read the introductory text on tabs 1 and 3 as well as these instructions.
Keep in mind that the focus of this project is corporate finance
. The information generated by the accounting system is important; but in finance, decisions are driven by an analysis of cash flows
rather than profits.
Tab 1
contains a series of exercises on the concept of the time value of money. These exercises do not relate directly to the issues facing LGI.
Tab 2
focuses on the concept of annuities
. The first few questions do not pertain specifically to LGI; the latter questions do.
Tab 3
pertains to whether LGI should acquire new assets that may enhance the company's productivity and thus improve financial performance.
061523
1. Briefly explain the meaning of the term "present value" in your own words.
Present-value is what something is worth now, in the present.
2. Briefly explain the meaning of the term "future value" in your own words.
3. What is the future value in five years of $1,500 invested at an interest rate of 4.95%?
Year
Interest
Total
1
74.25
1574.25
FV Formula
2 77.925375 1652.175
$1,909.87 3 81.782681 1733.958
4 85.830924 1819.789
5 90.079555 1909.869
4. What is the future value of a single payment with the following characteristics?
PV
$950
NPER
6 years
RATE
5.4%
Year
Intrest
Total
FV Formula
1
51.30
1001.3
$1,302.47 2
54.07
1055.37
3
56.99
1112.36
Future value is the worth in the future based off of factors such as intrest rates, time, and the current present value.
Time value of money (TVM) exercises
There are five variables in TVM calculations: present value, number of periods, rate of return, regular payments, and future value. If four of the variables are known, then the fifth can be calculated using algebra, a financial calculator, or a computer program such as Excel.
Excel functions for the five variables are as follows:
PV—present value NPER—number of periods RATE—rate of return
PMT—regular payments
FV—future value
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4
60.07 1172.428
5
63.31 1235.739
6
66.73 1302.469
5. What is the present value of $65,000 in six years, if the relevant interest rate is 8.1%?
PV Formula
FV of 40,743.2
$40,734.20 65000
6. What is the present value of a single payment with the following characteristics?
NPER
11 years
RATE
5.05%
PV Formula
FV
$10,000
$5,816.25 7. The present value of a payment is $4000. The future value of that payment in five years will b
Rate Formula
4%
8. What is the annual rate of return of a single payment with the following characteristics?
PV
$1,000
Rate Formula
NPER
15 years
17%
FV
$10,000
011022
be $4800. What is the annual rate of return?
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1. How many years would be required to pay off a loan with the following characteristics?
PV
$11,500
NPER
RATE
10.6%
14.24
PMT
$1,600 (annual payments)
2. What is the annual payment required to pay off a loan with the following characteristics?
PV
$14,700
RATE
9.95%
PMT
NPER
10 years
$2,387.22 3. Why is FV not part of the calculations for either question 1 or question 2?
4. At what annual rate of interest is a loan with the following characteristics?
NPER
17 years
Rate
PMT
$100,000
7%
PV
$1,000,000
For questions 5-8, LGI's cost of capital is
8.11%
5. LGI projects the following after-tax cash flows from operations from
its aging Bowie, Maryland distribution facility (which first went on line in 1953)
over the next five years. What is the PV of these cash flows?
Projected after-tax cash flows
Year
(in $ millions)
1
(40)
2
(40)
$4.42 3
(40)
4
(40)
5
(40)
($159.25)
There is no future value in the calculations due to there being no future value. They are paying a loan off in full so the future value is 0. Tab 2 - Annuities
6. LGI extended the analysis out for an additional 7 years, and generated the
following projections. What is the PV of these cash flows?
Projected after-tax cash flows
Year
(in $ millions)
1
(40)
2
(40)
3
(40)
4
(40)
5
(40)
6
(40)
7
(40)
8
(40)
9
(40)
10
(40)
11
(40)
12
(40)
($299.73)
7. The CFO asked you to undertake a more detailed analysis of the plant's costs, noting that while
it is convenient for making calculations when projections result in data that can be treated like an annu
this does not always represent the most accurate estimate of future results. What is the PV of these ca
Projected after-tax cash flows
Year
(in $ millions)
1
(40)
2
(50)
3
(55)
4
(60)
5
(70)
($214.63)
8. As part of a larger plan to sell off underperforming assets, LGI is considering selling the Bowie prope
and using other existing facilities more efficiently. LGI received four preliminary offers from potential bu
property. What is the PV of each offer? PV of each
Offer A
$102.17 million, paid today
102.17
Offer B
$19.85 million per year, to be paid over the next 8 years
$113.60 Offer C
$201.88 million, to be paid in year 8
$108.18
Offer D
$18.09 million per year, to be paid over the next 7 years and $122.26 a $53.05 million payment in year 8
9. From a profit maximizing point of view, which offer should LGI accept?
Largo Global Inc is advised to accept Offer D as it has the highest present value 10. Define the term annuity in your own words. How might the concept of an annuity impact the proc
capital budgeting and new asset acquisition?
Annuities are payments that are made in equal intervals. Annuuity impacts the process of captial budgeting b
when the annuity is due because the way that the intrest might be compounded.
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011022
uity,
ash flows?
erty uyers for the Bowie
offer (in $ millions)
18.09
18.09
18.09
18.09
18.09
18.09
18.09
53.05
cess of based on
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Table 1 - Data
Cost of the new manfactoring equipment
$
191.1
Corporate income tax rate - Federal
26.0%
Corporate income tax rate - State of Maryland
8.0%
Discount rate for the project 5.98%
Table 2 - After-tax Cash Flow Timeline
(all figures in $ millions)
Year
0
1
850.0 840.0 23.9 (13.9)
2
900.0 810.0 23.9 66.1 3
990.0 870.0 23.9 96.1 4
1,005.0 900.0 23.9 81.1 5
1,200.0 1,100.0 23.9 76.1 6
1,300.0 1,150.0 23.9 126.1 7
1,350.0 1,300.0 23.9 26.1 8
1,320.0 1,300.0 23.9 (3.9)
Table 3 - Example - Computin
For Year 4
(all figures in $ millions)
Projected Cash Inflows from Operations
1005.0 minus
Projected Cash Outflows from Operation
(900.0)
minus
Depreciation Expense
(23.9)
Projected Cash Inflows from Operations
Projected Cash Outflows from Operations
Depreciation Expense
Projected Taxable Income
Robotics-based equipment proposal
If the Bowie plant is sold, those operations will need to shift to the main Largo facility. The
sorting and distribution equipment to facilitate more cost-effective operations (and be abl
The CFO has asked you to evaluate the cash flow projections associated with the equipme
the purchase should go forward. Table 2 shows projections of the cash inflows and outflow
using the new equipment.
Keep the following in mind:
Depreciation. The equipment will be depreciated using the straight-line method over eigh
Taxes. The CFO estimates that company operations as a whole will be profitable on an ong
this specific project will provide a tax benefit in the year of the loss.
equals
Projected Taxable Income
81.1 Projected Taxable Income
81.1 times
Corporate income tax rate - Federal
26.0%
equals
Projected Federal Income Taxes
21.1 Projected Taxable Income
81.1 times
Corporate income tax rate - State
8.0%
equals
Projected State Income Taxes
6.5 1. Complete Table 2. Compute the projected after tax cash flows for each of years 1-8.
2. Compute the total present value (PV) of the projected after tax cash flows for years 1-8.
$308.32 490.7 3. Compute the net present value (NPV) of the projected after tax cash flows for years 0-8.
$189.46 4. Compute the internal rate of return (IRR) of the project.
25.84%
5. The CFO believes that it is possible that the next few years will bring a very low interest r
Therefore, she has asked that you repeat the NPV calculation in question 3 showing the cas
discount rate for the project is
5.02%
$204.63
011022
million
(191.1)
(3.6)
(1.1)
14.7 17.2 5.3 67.5 25.0 7.7 87.3 21.1 6.5 77.4 19.8 6.1 74.1 32.8 10.1 107.1 6.8 2.1 41.1 (1.0)
(0.3)
21.3 ng Projected After-tax Cash Flows
Projected Cash Inflows from Operations
1005.0 minus
Projected Cash Outflows from Operations
(900.0)
minus
Projected Federal Income Taxes
(21.1)
Projected Federal Income Taxes
Projected State Income Taxes
Projected After-tax Cash Flows e CEO is proposing to acquire robotics-based le to handle the increased workload) at Largo. ent purchase proposal and recommend whether ws that would occur during the first eight years ht years. The projected salvage value is $0.
going basis. As a result, any accounting loss on
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equals
Projected State Income Taxes
(6.5)
Projected After-tax Cash Flows 77.4 rate environment.
se where the
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