Corporation B. Capital Budgeting Questions:

1) Calculate the weighted average cost of capital for Corporation B as of year end 20X3. Corporation B purchased equipment in order to facilitate the processing of its product (with the intent of expanding its revenue) over the next few years. At the end of this project (end of 20X7), a supplierwill begin to take over the processing of this product. A few facts about the purchase are listed below:

a. The cost of the equipment, including shipping and installation, is $400,000. The entire amount will be paid in cash. The equipment will be purchased in early 20X4.

b. The life of the equipment is four years (end of 20X7), at which time it is expected to sell for $40,000.

c. Corporation B will initially purchase $200,000 of inventory; 70% of inventory purchases over the life of this project will be financed via accounts payable.

d. Recurring cash flows occur at year-end of each year, and termination cash flows occur at year-end 20X7.

e. All cash flows generated each year are paid to Corporation B (i.e., owner of the project).

Based on this information, Corporation B prepared the Projected Balance Sheet and Projected Income Statement for this project, which can be found in Appendix A.

2) Calculate the cash flows associated with this project. Calculate these cash flows by year, and for 20X4, separately calculate the cash flows that occur at the beginning and end of the year. You will have five cash flow calculations:

i. Beginning of 20X4

ii. End of 20X4

iii. End of 20X5

iv. End of 20X6

v. End of 20X7 (includes recurring cash flows and termination cash flows).

3) Compare the aggregate undiscounted cash flows to the aggregate net income flows. Explain the difference (if any).

4) Calculate the present value of the future cash flows.

5) Calculate the net present value and internal rate of return associated with this project.

6) Should Corporation B accept or reject this project? Explain your decision.

7) Compare the internal rate of return to the weighted average cost of capital. Is the difference

B I U ~ abe X X AZA 1 Normal 1 No Spac... Heading 1 Heading 2 Title Subtitle Subtle Em... = ainter Font Paragraph Styles Corporation B Corporation B Comparative Balance Sheets Comparative Income Statements As ofDecember 31, For the 12 Months Ended December 31 20X3 20X2 20X1 Cash 210,000 780,000 1,530,000 20X3 20X2 20X1 Accounts Receivable 410,000 360,0 00 300,000 Sales Revenue 4,010,000 3,400,0 00 2,300,000 Less: Allowance for Doubtful Accounts (4,100) (14,616) (1,50 0) Cost of Goods Sold Expense (2,520,000) (1,810,000) (940,000) Net Accounts Receivable 405,900 345,384 298,500 Salaries and Wages Expense (660,000) (840,000) (750,000) Inventory 436,000 405,000 330,000 Depreciation Expense-Building (115,000) (88,000) (70,000) Prepaid Insurance 15,000 18,000 21,000 Bad Debt Expense (11,000) (18,000) (8,000) Total Current Assets 1,066,900 1,548,384 2,179,500 Insurance Expense (117,000) (102,000) (95,000) (2,858,000) (1,863,000) Land 1,650,000 1,630,000 1,40 0,000 Total Expenses (3,423,000) 1,40 0,000 Operating Income 587,000 542,000 437,000 Buildings 2,300,000 1,760,000 52,740) (51,647) Less: Accumulated Depreciation 560,000) (490,000 (440,00 0) Interest Expense-Notes (66,946) Interest Expense-Bonds (44,072) (44,691) (45,285) Net Buildings 1,740,000 1,270,000 960,000 Loss from Inventory Write-Off 0 (86,000) 0 Total Long-Term Assets 3,390,000 2,900,0 00 2,360,000 Gain (Loss) Sale of Buildings (2,000) 45,000 (1,700) Total Assets 4,456,900 4,448,384 4,539,500 Gain (Loss ) Sale of Land (3,000 43,000 7,000 Accounts Payable 215,000 134,000 185,000 Total Other (101,812) (109,637) (91,633) Salaries and Wages Payable 63,000 49,000 40,000 Net Income Before Taxes 485,188 432,363 345,367 Dividends Payable 93,216 44,178 Income TaxExpense (30 percent rate) 145.556 129,709 103.610 Notes Payable-Line ofCredit 356,000 205,000 98,000 Net Income 339,631 302,654 241,757 Total Current Liabilities 727,216 432,178 323,000 Eamings per share 4.04 3.40 2.44 Notes Payable-Long Term 778,032 961 219 939,680 Bonds Payable 1,000,000 1,000,000 1,00 0,000 Add: Premium on Bonds Payable 89,826 105,753 121,062 Net Bonds Payable 1,089,826 1,105,753 1,121,062 Total LT Liabilities 1,867,857 2,066,973 2,060,743 Total Liabilities 2,595,073 2,499,151 2,383,743 Contributed Capital 1,500,000 1,500,000 1,50 0,000 Retained Earnings 1,167,827 925 233 691,757 Treasury Stock (806,0 00) (476,000) (36,00 0) Total Stockholders' Equity (SE ) 1.861,827 1.949.233 2.155,757 Total Liabilities and SE 4,456,900 4,448,384 4,539,500Font Paragraph Styles Corporation B Benson, Cundiff, & Gilbert Comparative Statements ofCash Flow Interview Ratios For the 12 Months Ended December 31 Firm and Industry Financial Ratios 20X3 20X2 20X3 / 20X2 Cash received from customers 3,938,484 3,335,116 20X3 20X2 Industry Cash paid to suppliers (2,470,000) (2,022,000) Return on Equity 0.25 021 0.19 Cash paid for salaries and wages 646,000) (831,000) Dividend Payout 02 0.16 0.1 Cash paid for insurance (114,000) (99,000) Return on Assets 0.11 0.1 0.1 Cash paid for income taxes (145,556) (129,709) Return on Sales 0.12 0.13 0.11 Cash paid for interest-Bonds (60,00 0) (60,00 0) Asset Turnover 0.9 0.76 1.02 Cash paid for interest-Notes Payable (52,740) (66,946) Current Ratio 1.47 3.58 2.35 Net Cash from Operating Activities 450,188 126,461 Quick Ratio 0.85 2.64 1.75 Investment in Land 300,000) (1,420,00 0) Debt/Assets 0.58 0.56 0.35 Accounts Receivable Days 35.04 35.43 35.68 Investment in Building (930,00 0) (640,00 0) Sale of Building 343,000 287,000 Inventory Days 60.91 74.11 41.5 Sale of Land 277,000 1,233,000 Accounts Payable Days 25.59 33.55 28.4 Net Cash fromInvesting Activities (610,000) 540,000) Summary. Cash Conversion Days 70.36 75.98 48.78 Proceeds (Payment) Notes Payable (32,188) 128,539 (Purchase) Sale Treasury Stock 330,000) (440,000) Corporation B Dividends Paid (48,00 0) (25,000) Projected Comparative Balance Sheets Cash from Financing Activities 410,188) (336,461) As of December 31 20X3 20X4 20X 5 20X8 20X7 Net Change in Cash 570,000) (750,00 0) Cash S Beginning Cash 780,000 1,530,000 Accounts Receivable 40 000 601000 70 000 Fivestory 200 000 230.000 250.000 280 000 Ending Cash 210,000 780,000 Current Asses 200 000 270 000 310 000 3:30 000 Equipment 4001000 400 000 4001000 400 000 400.000 Less: Accurulated Dear. 0 132 000 312 000 372 000 400 000 Net Equipment 400.000 268,000 88.000 28.000 Other 0 0 0 Total Long-Tenn Assets 400 000 288.000 88.000 28.000 Total Assets 600 000 538,000 398 0 00 358.000 Accounts Payable 140.000 16 1,000 175,000 182 000 Total Liabilities 140 000 16 1 000 175.000 182000 Equity 480.000 377.000 223.000 178.000 Total Liabilities & Equity 600 000 538,000 $ 398 900 358.000 $ rds - e here to search a 99+ X W 63.F A 6Corporation B Projected Comparative hoome Statements For the Years Ending December 31 20X4 20X5 20X6 20X7 Sales Revenue S 440,000 S 510,000 S 580,000 5 630,000 Cost of Goods Sold 140,000 180,000 210,000 250,000 Salaries Expense 60,000 75,000 90,000 120,000 Depreciation Expense 132,000 180,000 60,000 28,000 Other Expense 10 000 10,000 10,000 10.000 Total Operating Expenses 342,000 425,000 370,000 408,000 Gain (Loss ) Sale Asset 0 0 40.000 Net Income Before Taxes 98,000 85,000 190,000 282,000 hoome Tax Expense 29,400 25.500 67,000 78.800 Net Income 68,600 $ 59,500 S 133,000 $ 183,400