Please assist with attached five managerial finance questions. I need to see the formulas worked as to understand the process.

Mid term: Problem 2 Tax rate 35.00% Original cost of old machine Cost of new machine Proceeds from sale of old machine 110,000.00 Year 0 ($150,000.00) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 35,000.00 24,000.00 $11,000.00 11,000.00 10,000.00 $1,000.00 35,000.00 24,000.00 $11,000.00 11,000.00 10,000.00 $1,000.00 35,000.00 24,000.00 $11,000.00 11,000.00 10,000.00 $1,000.00 35,000.00 24,000.00 $11,000.00 11,000.00 10,000.00 $1,000.00 35,000.00 24,000.00 $11,000.00 11,000.00 10,000.00 $1,000.00 35,000.00 24,000.00 $11,000.00 11,000.00 10,000.00 $1,000.00 35,000.00 24,000.00 $11,000.00 11,000.00 10,000.00 $1,000.00 35,000.00 24,000.00 $11,000.00 11,000.00 10,000.00 $1,000.00 35,000.00 24,000.00 $11,000.00 11,000.00 10,000.00 $1,000.00 35,000.00 24,000.00 $11,000.00 11,000.00 10,000.00 $1,000.00 $10,000.00 3,500.00 $0.00 $6,500.00 $1,000.00 ($75,500.00) $7,500.00 $10,000.00 3,500.00 $6,500.00 $1,000.00 $7,500.00 $10,000.00 3,500.00 $6,500.00 $1,000.00 $7,500.00 $10,000.00 3,500.00 $6,500.00 $1,000.00 $7,500.00 $10,000.00 3,500.00 $6,500.00 $1,000.00 $7,500.00 $10,000.00 3,500.00 $6,500.00 $1,000.00 $7,500.00 $10,000.00 3,500.00 $6,500.00 $1,000.00 $7,500.00 $10,000.00 3,500.00 $6,500.00 $1,000.00 $7,500.00 $10,000.00 3,500.00 $6,500.00 $1,000.00 $7,500.00 $10,000.00 3,500.00 $6,500.00 $1,000.00 $7,500.00 $50,000.00 Tax consequence from sale of old machine New Gross Margin Old Gross Margin Difference in Gross Margin New Depreciation Old Depreciation Difference in Depreciation $24,500.00 Marginal gross income from new machine Minus income tax Equals Net income Plus depreciation Equals cash flow Cost of capital NPV Replace machine? 10.00% ($29,415.75) no Problem 5 HomeNet's Free Cash Flow Year Units Sold (in 000s) Sale Price Production cost 0 $ $ Incremental Earnings Forecast ($000s) 1 Sales $ 2 Cost of Goods Sold $ 3 Gross Profit $ 4 Selling, General, and $ Administrative 5 Research and Develop $ (15,000) 6 Depreciation $ 7 EBIT $ (15,000) 8 Income Tax at 40% $ (6,000) 9 Unlevered Net Incom $ (9,000) Free Cash Flow ($000s) 10 Plus: Depreciation $ 11 Less: Capital Expendi $ (7,500) 12 Less: Increases in N $ 13 Free Cash Flow $ (16,500) a. b. c. Year FCF 1 2 50 260 $ 120 $ $ 13,000 $ (6,000) $ 7,000 $ (2,800) $ $ (2,500) $ 1,700 $ 680 $ 1,020 3 100 234 $ 96 $ $ 23,400 $ (9,600) $ 13,800 $ (2,800) $ $ (2,500) $ 8,500 $ 3,400 $ 5,100 #REF! #REF! 150 211 $ 77 $ $ 31,590 $ (11,520) $ 20,070 $ (2,800) $ $ (2,500) $ 14,770 $ 5,908 $ 8,862 $ 2,500 $ 2,500 $ #REF! #REF! #REF! #REF! 2 #REF! a. #REF! b. #REF! c. #REF! What is the IRR of the project in this case? IRR = #REF! 3 #REF! 4 #REF! 5 #REF! 5 200 190 61 $ 37,908 $ (12,288) $ 25,620 $ (2,800) $ $ $ 22,820 $ 9,128 $ 13,692 2,500 $ 10% 12% 14% 0 1 $ (16,500) #REF! 4 $ $ $ ### ### - - $ - #REF! #REF! $ $ $ $ #REF! #REF! Answers to Homework #4 Corporate Finance Answers 1. Cellular Access, Inc. is a cellular telephone service provider that reported net income of $250 million for the most recent scal year. The rm had depreciation expenses of $100 million, capital expenditures of $200 million, and no interest expenses. Working capital increased by $10 million. Calculate the free cash ow for Cellular Access for the most recent scal year. FCF = Unlevered Net Income + Depreciation CapEx Increase in NWC ar stu ed d vi y re aC s ou ou rc rs e eH w er as o. co m 250 + 100 200 10 = $140 million 2. Castle View Games would like to invest in a division to develop software for video games. To evaluate this decision, the rm rst attempts to project the working capital needs for this operation. Its chief nancial ocer has developed the following estimates (in millions of dollars): Assuming that Castle View currently does not have any working capital invested in this division, calculate the cash ows associated with changes in working capital for the rst ve years of this investment. Cash Accounts Receivable Inventory Accounts Payable Net working capital Increase in NWC Year 1 6 21 5 18 14 14 Year 2 12 22 6 22 19 5 Year 3 15 24 10 24 25 6 Year 4 15 24 12 25 26 1 Year 5 15 24 13 30 22 -4 3. Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash ows are dicult to estimate, management has projected the following cash ows for the rst two years (in millions of dollars): Year 1 125 40 25 5 30 35% Year 2 160 60 36 8 40 35% sh Th is Revenues Cost of goods sold and operating expenses other than depreciation Depreciation Increase in Working Capital Capital expenditures Marginal corporate tax rate (a) What are the incremental earnings for this project for years 1 and 2? Sales Cost of goods sold and operating expenses besides depreciation Depreciation EBIT Income tax at 35% Unlevered net income https://www.coursehero.com/file/9324197/Homework-4-Answers/ 1 of 3 Year 1 125 (40) (25) 60 (21) 39 Year 2 160 (60) (36) 64 (22.4) 41.6 (b) What are the free cash ows for this project for the rst two years? Depreciation Capital Expenditures Increases in NWC Free Cash Flow Year 1 25 (30) (5) 29 Year 2 36 (40) (8) 29.6 (c) If the cost of capital for this project is 14%, what is the net present value the project for the rst two years? 29.6 29 + = $48.21 million NPV = 1.14 1.142 ar stu ed d vi y re aC s ou ou rc rs e eH w er as o. co m 4. One year ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that oers many advantages; you can purchase it for $150,000 today. It will be depreciated on a straight-line basis over 10 years, after which it has no salvage value. You expect that the new machine will produce EBITDA (earning before interest, taxes, depreciation, and amortization) of $40,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $20,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense for the current machine is $10,000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $50,000. Your companys tax rate is 45%, and the opportunity cost of capital for this type of equipment is 10%. Is it protable to replace the year-old machine? Replacing the machine increases EBITDA by 40, 000 20, 000 = 20, 000. Depreciation expenses rise by 15, 000 10, 000 = 5, 000. Therefore, FCF will increase by 20, 000 (1 0.45) + 0.45 5, 000 = $13, 250 in years 1 through 10. In year 0, the initial cost of the machine is $150,000. Because the current machine has a book value of 110, 000 10, 000 (one year of depreciation) = $100,000, selling it for $50,000 generates a capital gain of 50, 000 100, 000 = 50, 000. This loss produces tax savings of 0.45 50, 000 = $22,500, so that the after-tax proceeds from the sales including this tax savings is $72,500. Thus, the FCF in year 0 from replacement is 150, 000 + 72, 500 = $77, 500. ( ) 1 1 NPV of replacement = 77, 500 + 13, 250 1 = $3916 .10 1.1010 There is a small prot from replacing the machine. is 5. Markov Manufacturing recently spent $15 million to purchase some equipment used in the manufacture of disk drives. The rm expects that this equipment will have a useful life of ve years, and its marginal corporate tax rate is 35%. The company plans to use straight-line depreciation. Th (a) What is the annual depreciation expense associated with this equipment? 15/5 = $3 million/year (b) What is the annual depreciation tax shield? sh .35 $3 = 1.05 million/year (c) Rather than straight-line depreciation, suppose Markov will use the MACRS depreciation method for ve-year property. Calculate the depreciation tax shield each year for this equipment under this accelerated depreciation schedule. (Hint: Use the MACRS table back of your textbook or the ve year column in Table 1 at http://www.smbiz.com/sbrl012.html.) Equipment Cost MACRS Depreciation Rate Depreciation Expense Depreciation Tax Shield Year 0 15,000 20.00% 3,000 1,050 https://www.coursehero.com/file/9324197/Homework-4-Answers/ Year 1 Year 2 Year 3 Year 4 Year 5 32.00% 4,800 1,680 19.20% 2,880 1,008 11.52% 1,728 605 11.52% 1,728 605 5.76% 864 302 2 of 3 (d) If Markov has a choice between straight-line and MACRS depreciation schedules, and its marginal corporate tax rate is expected to remain constant, which should it choose? Why? In both cases, its total depreciation tax shield is the same. But with MACRS, it receives the depreciation tax shields sooner. Thus, MACRS depreciation leads to a higher NPV of Markovs FCF. (e) How might your answer to part (d) change if Markov anticipates that its marginal corporate tax rate will increase substantially over the next ve years? If the tax rate will increase substantially, than Markov may be better o claiming higher depreciation expenses in later years, since the tax benet at that time will be greater. 6. Bay Properties is considering starting a commercial real estate division. It has prepared the following four-year forecast of free cash ows for this division: Year 1 -$185,000 Year 2 $12,000 Year 3 $99,000 Year 4 $240,000 ar stu ed d vi y re aC s ou ou rc rs e eH w er as o. co m Free Cash Flow Assume cash ows after year 4 will grow at 3% per year, forever. If the cost of capital for this division is 14%, what is the continuation value in year 4 for cash ows after year 4? What is the value today of this division? 247, 200 Continuation Value in Year 4 = = $2, 247, 273 0.14 0.03 185, 000 12, 000 99, 000 240, 000 + 2, 247, 273 NPV = + + + = $1, 367, 973 1.14 1.142 1.143 1.144 Formulas Incremental Income Tax Expense Income Tax = EBIT c Free Cash Flow FCF =(Revenues Costs) (1 c ) CapEx (1) N W C + c Depreciation (5) Unlevered Net Income Gain on Sale is Net Income = EBIT (1 c ) Gain on Sale = Sale Price Book Value Th = (Revenues Costs Depreciation) (1 c ) (2) Book Value sh Net Working Capital NWC = Cash + Inventory + Receivables Payables (3) Book Value = Purchase Price Accumulated Depreciation (7) After-Tax Cash Flow from Asset Sale Increase in Net Working Capital in Date t N W Ct = N W Ct N W Ct1 https://www.coursehero.com/file/9324197/Homework-4-Answers/ Powered by TCPDF (www.tcpdf.org) (6) (4) FCF from Asset Sale = Sale Price c Gain on Sale (8) 3 of 3