P4_Final_Mills_Calculation(Corrected)_11.28.2023

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University of Maryland Global Campus (UMGC) *

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620

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Finance

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Jan 9, 2024

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xlsx

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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.
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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
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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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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