Individual Assignment

Time: 2 hours

Marks: 10%

1. With the following information, calculate the break-even point in sales dollars for CompuTech's product lines A, B, and C.

Revenue

Product line A $ 45,000

Product line B $ 21,750

Product line C $ 35,000

Cost of sales for the three product lines is 45%, 50%, and 52% of revenue, respectively.

Fixed costs are estimated at $32,000.

1. A business has two options:

(A) lease a $ 60,000 machine over a five-year period with an annual lease payment of $ 14,000;

(B) borrow $ 60,000 amount from the bank over the five-year period to buy the asset. The bank would charge a 9 % interest.

Other financial assumptions are:

the company's income tax rate is 30 %;

the capital cost allowance for the equipment is 40 %;

the equipment has no residual value

Please calculate the the cash flows for each financing alternative. Which alternative is the most economical?

1. Simon recently received a credit card with an 18% nominal interest rate. With the card, he purchased an Apple iPhone 7 for $372.71. The minimum payment on the card is only $10 per month. If Simon makes the minimum monthly payment and makes no other charges, how

many months will it be before he pays off the card? Round to the nearest month.

1. Hook Industries is considering the replacement of one of its old drill presses. Three alternative replacement presses are under consideration. The relevant cash flows associated with each are shown in the following table. The firm's weighted average cost of capital is 15%.

Press An Press B

Initial investment (CF0) $85,000 $60,000

Year (t) Cash inflows (CFt)

1 $18,000 $12,000

2 18,000 14,000

3 18,000 16,000

4 18,000 18,000

5 18,000 20,000

6 18,000 25,000

7 18,000 40,000

8 18,000 50,000

Required

a. Calculate the net present value (NPV) of each press.

b. Using NPV, evaluate the acceptability of each press. Assume: the press are mutually exclusive