Please explain this math to me. I'd appreciate help with the answer:

EAC=138100/(1-1/(1+.13797)?10)/ .13797 and

EAC=115000/(1-1/(1+.13797)?7)/ .13797

thank you!

Instructions 1. Save this MS Word document (template) to your computer as follows: If the current term is: Save the MS Word document (template) using the following file naming convention: Spring 1 MBA_C604_S8W1-16_Final_YourLastName_YourFirstInitial Spring 2 MBA_C604_S8W2-16_Final_YourLastName_YourFirstInitial Summer 1 MBA_C604_M8W1-16_Final_YourLastName_YourFirstInitial Summer 2 MBA_C604_M8W2-16_Final_YourLastName_YourFirstInitial Fall 1 MBA_C604_F8W1-16_Final_YourLastName_YourFirstInitial Fall 2 MBA_C604_F8W2-16_Final_YourLastName_YourFirstInitial Where \"16\" = 2016 2. The instructor will make this final course assessment available to the class on the day and in the manner indicated in the course syllabus. Not later than the due date and time indicated in the course syllabus, (i) complete the assessment according any further directions stated below and (ii) submit it in the manner (via the Course Dropbox tool or RegisNet email using INsite) set forth in the Facilitator Expectations posting. Five problems/questions comprise the final course assessment with maximum point values indicated below: Topic Maximum points possible Your points earned Estimated minutes required to complete 5 - Net present value analysis 20 15 6 - Capital budgeting and the cost of capital 20 20 7 - Working capital management 20 10 8 - Financial ratio analysis 20 30 9 - Projected financial statements and financing requirements 20 30 100 105 Total Students must complete this assessment individually, not in collaboration with others. The course syllabus sets forth the university's academic integrity policy and the various sanctions that the university may impose on students for violations of that policy, including use of inappropriate sources of information on examinations. 1 Topic 5 (20 points) The CEO of Southwest Manufacturing Company has asked for your analysis of and recommendation related to the proposed acquisition of an additional stamping machine for its principal manufacturing plant. Demand for the company's products has risen to a level that exceeds its present productive capacity. An additional stamping machine will make it possible for the company to increase its production and sales by 15 percent, resulting in projected incremental relevant cash flows (after income taxes and the tax benefits of the \"depreciation tax shield\") in each of the next five years, as indicated at right: Yea r Projected incremental cash flows 1 $20,000 2 30,000 3 40,000 4 30,000 5 20,000 Tota l $140,000 The equipment will cost $100,000 to purchase and install. Management estimates that its economic life will be five years, after which it will have no residual value. The company's required rate of return on new investments (cost of capital) is 12.0 percent (or, 0.12). a. Complete the NPV analysis of the stamping machine proposal, below. Regard all incremental relevant cash flows as \"risky\" and assume they occur at the end of years indicated, as listed above. b. State your recommendation to the CEO, including the basis for it. Limit the length of your response to 50 words. a. Complete the NPV analysis of the stamping machine proposal: Year (n) \"Time zero\" Relevant cash flow Discount factor Discounted cash flows -100000 1.00000 (100,000) 1 20000 .89285 17,857.14 2 30000 .79719 23,915.81 3 40000 .71178 28,471.20 4 30000 .63551 19,065.54 5 20000 .56742 11,348.53 NPV 658.22 b. State your recommendation to the CEO, including the basis for it. Limit the length of your response to 50 words. The overall NPV of the project is 658.25>0 suggests the project will add value to the company's growth. From the above evaluation, we conclude that if investment in equipment is undertaken there is definitely increase in production and sales that can increase value of the firm. The expected Rate of Return exceeds the required Rate of Return on new investments and therefore the investment in equipment should be undertaken. 2 Topic 6 (20 points) The VP-Operations of Southwest Manufacturing Company has asked for your review of her capital budgeting analysis, comparing two alternative machines the company is considering acquiring for one of its plants. Using the information provided in the table below, complete her analysis by computing the company's cost of equity capital, rE, weighted average cost of capital, rWACC, and the equivalent annual cost (EAC) for each machine under consideration. State your recommendation to the VP with regard to selecting one of these machines. Continued 3 a. Compute the company's cost of equity capital, rE. Show computations in good form and label properly all amounts presented. Re = Rf+B*(RmRf) Re=.04+1.6*(.125- Re=.176 (17.6%) .04) b. Compute the company's weighted average cost of capital, rWACC. Show computations in good form and label properly all amounts presented. Business' weighted average cost of capital = Business' cost of equity capital, rE X Portion of business' total capital that is equity, E + Business' current cost of debt, rD, aftertax X Portion of business' total capital that is debt, D rWACC rE E / (D + E) rD x (1 - t) D / (D + E) =0.176 x 0.63/(0.370 + 0.63) +0.095 x (10.400) X 0.370/ (0.370+0.63) =0.13797 or 13.2% c. Compute the equivalent annual cost (EAC) for each machine under consideration, ignoring \"cost recovery\" income tax deductions, the tax deductibility of ownership costs, and capital gains taxes upon the machine's disposal). Show computations in good form and label properly all amounts presented. Machine X EAC=NPV/(1-1/ (1+Rwacc)^n) EAC=138100/(11/(1+.13797)10)/ .13797 Machine X Machine Y EAC=115000/(1-1/ Machine Y (1+.13797)7)/ . 13797 /Rwacc EAC=138100/8.53 EAC=16,189.53 EAC=115000/6.23 EAC=18,458.23 d. State your recommendation to the VP-Operations, including the basis for it. Limit the length of your response to 50 words. The company should opt for machine X since it has low equivalent cost of annual outflow than that of machine Y. The owner should select machine X as it has higher NPV as compared to machine Y's as well as having a lower running cost. 4 Topic 7 (20 points) The VP-Sales and Marketing of Southwest Manufacturing Company has asked for your analysis of her proposal to modify the company's current terms of sale, \"2/10, net/30.\" She has proposed more generous terms - \"3/5, net/30\" - in order to promote increased sales and market share. She has acknowledged that more generous terms may also lead to increased bad debts. The business' operating budget for the forthcoming fiscal year includes the following relevant information: Budgeted unit sales, Q1 Budgeted unit selling, SP Budgeted bad debts, BD1, as percent of sales Budgeted unit variable cost, VC (excluding BD1) 5,000,000 units $20 per unit 0.01 (or, 1.0 percent) $10 per unit Combined effective income tax rate, t 0.40 (or, 40.0 percent) Current interest rate on business' debt, rD 0.12 (or, 12.0 percent) 0.02 (or, 2.0 percent) In addition, based on the existing terms of sales: Discount percentage, CD1 Discount period, DP1 10 days Under the proposed terms of sales: Discount percentage, CD2 Discount period, DP2 Estimated bad debts, BD2, as percent of sales 0.03 (or, 3.0 percent) 5 days 0.015 (or, 1.5 percent) Continued 5 a. Compute the NPV of the company's existing terms of sales based on its operating budget and other information provided, above. Show computations in good form and label properly all amounts presented. NPV=-VC*Q1(1-t)+SP*Q1*(1CD1)-(1-BD1)(1-t)/[1+rd*(1t)/365]^DP1 10*500000*(1-.40)+20*500000*(1-.02)*(1-. 01)*(1-.4)/[1+.12*(1-.4)/365]^10 =10*5000000*(10.4) (30,000,000) =20*5000000*(10.02)*(10.01)*(1-0.4) 58,212,000 =(1+0.12*(10.4)/365)^10 NPV=-30000000+58097295 NPV= 28,097,295 =58212000/1.001974 = 58,097,295 1.001974 b. Compute the required sales volume, Q2, under the proposed terms of sale necessary to achieve the NPV of the existing credit policy - i.e., the \"break even\" unit sales volume. Show computations in good form and label properly all amounts presented. 28,097,295=10*Q2*(1-.40)+ 20*Q2*(1-.03)* (1-.015)*(1-.4)/ [1+.12*(1-.4/36 5]^5 28,097,295=6*Q2+20*Q2*(.97)*(.985)*(.6)/1.00098 7 28,097,295=6*Q2+11.47*Q2/1.00098 7 NPV=-VC*Q1(1-t)+SP*Q1*(1CD2)-(1-BD2)(1-t)/[1+rd*(1t)/365]^DP2 28,097,295=6*Q2+11.47*Q2 28,097,295=5.47*Q2 Q2=5,136,617 units 5136617/5000000 2.7% increase 6 Topic 8 (20 points) Demonstrate your ability to apply financial ratio analysis to common-sized financial statements. Analyze the common-sized balance sheet and income statement of FirstRate Company, included in the Topic 8 background paper, Financial Ratio Analysis. Identify the most significant: Trends in the 20X0 - 20X4 common-sized financial information, and Differences between the common-sized financial information of the company and its industry's norms Your analysis should indicate the basis on which you indentified trends or differences as significant, including the potential implications for FirstRate's business or financial condition. Limit your response to a maximum of 200 words. Spell-check and-grammar-and-style-check your completed response using MS Word's tool for this purpose, being sure to correct any matters identified by these checking tools. Student's response Please provide your word count here Your response here (please do not modify the formatting, fonts, colors, and so forth in this document template) 7 Topic 9 (20 points) The CEO of North American Manufacturing Company has asked you to (a) complete the projected income statement and projected balance sheet for the coming fiscal year (FY) of the company using the information set forth below. She has also asked you to (b) determine the amount of any additional external financing the company will require during the coming fiscal year and (c) assess the reasonableness of the projections in relation to the company's estimated cost of equity capital, rE, and its sustainable sales growth rate. 1. Use the average gross margin during the preceding two-year period to project the amount of gross profit. 2. Use the average ratio of "all other S&A-to-sales revenue" during the preceding two-year period to project the amount of all other S&A expense. 3. Use the average amount of R&D expense during the two preceding FYs to project the amount of this expense. 4. The estimated combined effective income tax rate during the projected FY is 0.40 (40.0 percent). 5. Project the balances of cash and cash equivalents, total current assets, and total liabilities as \"residual amounts\" using the general methodology examined in Topic 9 of the course. Project total assets using the projected balance of total liabilities and shareholders' equity. Project the balance of total liabilities and stockholders' equity based on projected total stockholders' equity and a targeted total debt ratio (ratio of total liabilities-to-total stockholders' equity) of 0.70 (70 percent). 6. Project the balance of accounts receivable (AR) using a projected average AR collection period ratio of 45 days. 7. Project the balance of inventory using a projected average days to sell inventory ratio of 90 days. 8. Project the balance of other assets using the average balance of this item during the two preceding FYs. 9. Project the balance of accounts payable (AP) using projected "cash costs" and a projected average AP payment period of 45 days. "Cash costs" include projected COGS and operating expenses, excluding depreciation. 10. Project the balance of dividends payable as the dividends that the company expects to declare during the final week of the projected FY (based on net income for that year) and pay early in the next FY. The company's payout ratio (dividend policy) is 0.40 (40 percent). 11. The company plans no issuances (or repurchases) of common stock during the projected FY. 12. Project retained earnings (RE) using projected net income and projected dividends to be declared near the end of the projected FY. 13. The company's estimated cost of equity capital, rE, is 0.227 (22.7 percent), computed using CAPM as: rF + x (rM - rF) = 0.04 + 2.2 x (0.125 - 0.04) Continued 8 Continued a. Projected income statement Actual (historical) (A Sales revenue ) Projected Computational Notes (Formulas or equations used) 20X0 20X1 20X2 $48,500,0 00 50,900,00 0 $ 55,000,000 Given 7,300,000 Given Cost of goods sold (COGS): (B ) Deprec. of manufacturing PP&E (C ) All other COGS ( D ) Total COGS (E ) Gross profit (F ) Gross margin 6,695,000 6,985,000 25,800,00 0 26,100,00 0 29,000,000 =D-B 32,495,00 0 33,085,00 0 36,300,000 =A-E $ 16,005,00 0 17,815,00 0 18,700,000 =A*F 33.0% 35.0% 34% =E/A $ 360,000 520,000 $ 700,000 5,820,000 6,108,000 6,600,000 =A*.12 11,928,000/99,400,000 1,290,000 1,510,000 1,400,000 =Average (1290000+1510000) Operating expenses: Selling and admin. (S&A) exp.: ( G ) Deprec. of non-mfg PP&E ( H ) All other S&A expense Given (I ) Research and devel. (R&D) exp. (J ) Other operating expenses 135,000 (K ) Total operating expenses 7,605,000 8,315,000 8,900,000 =SUM(G:J) 8,400,000 9,500,000 9,800,000 =E-K (L ) Operating income ( M ) Interest on debt ( N ) Income from investments ( O Gain (loss) on PP&E disposals (660,000) 10,000 - 177,000 (750,000) 10,000 (94,000) 200,000 (810,000) Given Given 10,000 Given - Given 9 ) (P ) Income before taxes ( Q ) Provision for income taxes (R Net income ) 7,750,000 8,666,000 9,000,000 =L+M+N+O 3,100,000 3,466,000 3,600,000 =P*.40 $ 4,650,000 5,200,000 5,400,000 =P-Q Continued 10 Continued a. (continued) Projected balance sheet Assets: Current assets: Actual (historical) 20X0 Projected Computational Notes 20X1 20X2 (Formulas or equations used) (A ) Cash and cash equivalents $ 450,000 690,000 (7,300,000) =E-D-C-B (B ) Investment securities 200,000 200,000 200,000 Given (C ) Accounts receivable 6,060,00 0 6,360,000 6,875,000 =A/360*45 (D ) Inventory 8,120,00 0 8,270,000 9,075,000 =D/360*90 (E ) Total current assets 14,830,0 00 15,520,00 0 8,850,000 =J-H-I Current ratio (working capital) ratio 1.0 1.0 .53 =E/P (F ) PP&E, at cost 38,510,0 00 45,790,00 0 53,800,000 Given (G ) Accumulated depreciation of PP&E 14,260,0 00 20,340,00 0 26,300,000 Given (H PP&E, net ) 24,250,0 00 25,450,00 0 27,500,000 (I ) Other assets 600,000 900,000 (J) Total assets $ 39,680,00 0 41,870,00 0 37,100,000 =(V+V)*.7 $ 4,130,000 4,240,000 4,737,500 =D+K-B/360*45 750,000 =F-G =Average (600,000+900,000) Liabilities: Current liabilities: (K ) Accounts payable (L ) Accrued income taxes payable 780,000 870,000 ( M ) Dividends payable 1,860,00 0 2,080,000 (N Bank notes payable - ) current 7,800,00 0 8,000,000 (O Accrued interest payable ) 170,000 190,000 (P ) 14,740,0 00 15,380,00 0 16,797,500 =SUM(K:O) 4,800,00 3,230,000 (6,197,500) =R-P Total current liabilities (Q Bank notes payable - 900,000 2,160,000 Given =R(NI)*.4 8,800,000 Given 200,000 Given 11 ) (R ) noncurrent Total liabilities Total debt ratio 0 19,540,0 00 0.97 18,610,00 0 0.80 10,600,000 =W-V .40 =R/V Stockholders' equity: (S ) Common stock, at par 12,500,0 00 12,500,00 0 12,500,000 No changes (T ) Additional paid-in capital 2,600,00 0 2,600,000 2,600,000 No changes (U ) Retained earnings 5,040,00 0 8,160,000 11,400,000 =U(PY)+R-M (V ) Total stockholders' equity 20,140,0 00 23,260,00 0 26,500,000 =S+T+U ( W ) Total liab. and stockhldrs' equity $ 39,680,00 0 41,870,00 0 37,100,000 =(V+V)*.7 Continued 12 Continued b. Determine the amount of any additional external financing the company will require during the coming FY. Show computations in good form and label properly all amounts presented. Cash & equivalents from 20X2 (7,300,000) 7,300,000 Band notes payable (6,197,500) 6,197,500 True need to borrow: (7,300,000) - (6,197,500) = 1,102,500 Total debt ratio is 40%. The company can borrow money either on a line of credit or a finance loan to cover needed inventory. c. Assess the reasonableness of the projected financial statements in relation to the company's estimated cost of equity capital, rE, and its sustainable sales growth rate. Actual (historical) 20X0 Return on average common equity (ROCE) ratio Net income (available to common stockholders) 20X1 24.8% 24.0% $ 4,650,000 5,200,000 Projected 20X2 21.7% 5,400,000 $ Total stockholders' equity, beginning of FY 17,350,000 20,140,000 23,260,000$ Total stockholders' equity, end of FY 20,140,000 23,260,000 26,500,000$ $ 18,745,000 21,700,000 24,880,000$ Average total stockholders' equity Sustainable rate of sales growth Net income (available to common stockholders) Beginning-of-year shareholders' equity 8% $5198000 $25820000 Payout ratio 40% Assessment of projected ROCE and sustainable growth rate in sales ratios (limit your response to a maximum of 100 words): Since the working capital is lower than past years, (less than 1.0), there is an indication of less cash on hand for expenditures. This could show that sales and services may be decreasing. However, sales revenue is high, and may be due to the payment/credit terms have been relaxed, in turn prompted inventory to increase, and shows their product is in demand. The sustainable growth rate is 14% and the ROCE is 21.7%. The debt ratio is 40%, which indicates that the company is borrowing less therefore strengthening their equity. The higher ROCE ratio over previous years indicates more efficient use of its capital. The company's financial strategies show that they are stable and growing. 13