(11-4) Although the Chen Companys milling machine is old, it is still in relatively good working

order and would last for another 10 years. It is inefficient compared to modern standards,

though, and so the company is considering replacing it. The new milling machine, at a

cost of $110,000 delivered and installed, would also last for 10 years and would produce

after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It

would have zero salvage value at the end of its life. The firms WACC is 10%, and its

marginal tax rate is 35%. Should Chen buy the new machine?

(11-6) The Campbell Company is considering adding a robotic paint sprayer to its

production line. The sprayers base price is $1,080,000, and it would cost another

$22,500 to install it. The machine falls into the MACRS 3-year class, and it would be

sold after 3 years for $605,000. The MACRS rates for the first three years are 0.3333,

0.4445, and 0.1481. The machine would require an increase in net working capital

(inventory) of $15,500. The sprayer would not change revenues, but it is expected to

save the firm $380,000 per year in before-tax operating costs, mainly labor.

Campbells marginal tax rate is 35%.

a. What is the Year 0 net cash flow?

b. What are the net operating cash flows in Years 1, 2, and 3?

c. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of

working capital)?

d. Based on your IRR analysis, if the projects cost of capital is 12%, should the machine be purchased?

Chapter 12 Problems

(12-1) Broussard Skateboards sales are expected to increase by 15% from $8 million in

2013 to $9.2 million in 2014. Its assets totaled $5 million at the end of 2013.

Broussard is already at full capacity, so its assets must grow at the same rate as

projected sales. At the end of 2013, current liabilities were $1.4 million, consisting

of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of

accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted

payout ratio is 40%. Use the AFN equation to forecast Broussards additional funds

needed for the coming year.

(12-8) Stevens Textiless 2013 financial statements are shown here:

Balance Sheet as of December 31, 2013 (Thousands of Dollars)

Cash $ 1,080 Accounts payable $ 4,320

Receivables 6,480 Accruals 2,880

Inventories 9,000 Line of credit 0

Total current assets $16,560 Notes payable 2,100

Net fixed assets 12,600 Total current liabilities $ 9,300

Mortgage bonds 3,500

Common stock 3,500

______ Retained earnings 12,860

Total assets $29,160 Total liabilities and equity $ 29,160

Income Statement for December 31, 2013 (Thousands of Dollars)

Sales $36,000

Operating costs 32,440

Earnings before interest and taxes $ 3,560

Interest 460

Pre-tax earnings $ 3,100

Taxes (40%) 1,240

Net income $ 1,860

Dividends (45%) $ 837

Addition to retained earnings $ 1,023

a. Suppose 2014 sales are projected to increase by 15% over 2013 sales. Use the

forecasted financial statement method to forecast a balance sheet and income

statement for December 31, 2014. The interest rate on all debt is 10%, and cash

earns no interest income. Assume that all additional debt in the form of a line of

credit is added at the end of the year, which means that you should base the

forecasted interest expense on the balance of debt at the beginning of the year. Use

the forecasted income statement to determine the addition to retained earnings.

Assume that the company was operating at full capacity in 2013, that it cannot sell

off any of its fixed assets, and that any required financing will be borrowed as

notes payable. Also, assume that assets, spontaneous liabilities, and operating costs

are expected to increase by the same percentage as sales. Determine the additional

funds needed.

b. What is the resulting total forecasted amount of the line of credit?