Case 14 $51,000 each, and the additional business would bring in almost 5700,000 in new win the first we years alone. (See Figure 4 for details). In her mind, Emily quickly went over the evaluation methods she had used in the past payback internal rate of return, and not present value. Emily knew that Kay would add a fourth, site of reported earnings, but she hoped she could talk Kay out of using it this time. Emily herself feed the present value method, but she had always had a tough time getting Kay to understand it One additional constrain that Tmely had to deal with was Kay's insistence that he outside financing be used this year. Kay was worried that the company was growing too fast and had pilep Figure 1 Financial analysis of Project Add a twinget to the company feet Eppenditure Year 3300,000 Netcost of new plane All Additional penting Depreciation Nur in Last: The 31% Increase in the Alba direction Net change in cartow 543,000 11.250 45.000 (13.250) 576,500 11.250 $6.000 (450) 25.000 11250 3.30 250:50 3112300 11.350 23.800 3,050 12.552 B.ON 563,00 88.00 SIG.750 11.250 9.00 9.500 LIS 545.000 31,750 5300,000) 66,000 65.550 3.000 563.000 128315 Figure 2 Financial analysis of Project : Dhanally into copy machine Expedie Your Niet cost of new franchise 700.000 Add 589.500 5179.000 $262.500 199250 Additional operating 2.250 26,250 2.250 Amor 12.30 17.30 Net Increase in income 43,750 11.30 218.750 350.000 Le Taxat 30% 140 0.13 72188 US.SE Increase in attestaticom 3.12.33 SIS 24. Add luck dertion $ 17,900 $17.900 $ 17,500 5 17.500 Ne change in cash flow (5700,000) 105,608 154.963 22.000 26.250 S35,000 26.250 17.20 250 IS 2. $17.500 199.90 3 mough debt for the time being. She was also apaint stock issue for fear of diluting earnings and her control over the firm. As a result of Kay's prohibition of outside financing, the size of the capital budget this year was limited to $800,000, which meant that only one of the four projects under consideration could be chosen. Emily wasn't too happy about that, either, but she had decided to accept it for now, and concentrate on selecting the best of the fou As she closed her briefcase and walked toward Kay's door. Emily reminded here to have patience, Kay might not trust financial analysis, but she would listen to sensibile gamento. Emily only hoped her financial analysis sounded sensible Aerocom, Inc 57 Figure Financial analysis of Project. Adidaperto e company feet pie $800,000 Netcost oftler Additional Additional penting Depreciate Netinere $300,000 40.000 5100.000 40.000 12 150,000) $300,000 2.300 17.00 16.00 $450,000 $600,000 -0.000 40,000 18.000 6.000 30.000 92.000 90.00 Les T33% Inome income 16 Add had depreciation Net chempio cash flow $120.000 50.000 SER SIS. 238 40 5175.000 160.000 S3286 516,000 $16.000 390,140 430.540 (5800,000) Figure Facials of Project Add out of trucks Ter2 Eigenrer Te $530,000 Ne con of the Additional Adlering Depreciation Notice in lume Les T30% Increase in alertain Add hack depreciation Merchange ich fow . $382.500 19.128 2.500 26. 14.09 312.2016 17.00 12.15 19.125 112.22 199,000 SMO 31. 192.100 23,250 25.500 1200 30) $51.000 3250 102.18 390) 3235 $10.00 20 G92) 107,100 $112.00 2014 10000) 5107,100 12.750 Required: 1. Refer to Figures 1 through 4. Add up the total increase in after-tax income for each project. Given what you know about Kay Mash, to which project do you think she will be attracted? 2. Computer the Payback Period, Discounted Payback Period, Net Present Value, Internal Rate of Return (IRR), and Productivity Index of all four alternatives based on cash flow. User 10 percent for the cost of capital in your calculations. For the Payback period and for the Discounted Payback Period, compute to the midyear points as discussed in class. 3. a. According to the payback method, which project should be selected? b. What is the chief disadvantage of this method? c. Why would anyone want to use this method? 4. a. According to the Discounted Payback method, which project should be selected? b. What is the chief disadvantage of this method? c. Why would anyone want to use this method? 5. a. According to the Net Present Value method, which project should be selected? b. What are the major advantages of the Net Present Value method? c. What are any disadvantages of the Net Present Value Method? d. If Kay had not put a limit on the size of the capital budget, under the NPV method which projects would have been accepted? 6. a. According to the IRR method, which project should be chosen? b. What is the major disadvantage of the IRR method that occurs when HIGH IRR projects are selected? c. Can you think of another disadvantage of the IRR method? (Hint: Look over the four alternatives and compare the sizes of the projects. Ask yourself whether you would prefer to make a large percent return on a small amount of money or a small percent gain on a large amount of money.) d. Do the NPV and IRR both reject the same projects - Why? 7. a. According to the Productivity Index, which project should be chosen? b. Explain why people use the Productivity Index. c. Explain why a Productivity Index so closely correlates with the results of NPV