See attachment please... I have solved all the problems - questions would like another set of eyes to confirm my results.

Thanks

Assignment 2: Management Accounting Application In this assignment you will demonstrate your understanding of capital investment techniques by evaluating the following three case studies. Case Analysis 1 - Weight 20% of total assignment You work for a small, local telecommunications company. In five years, the company plans to undertake a major upgrade to its servers and other IT infrastructure. Management estimates that it will need up to $450,000 to cover all related costs; however, as a fairly young company, the goal is to pay for the upgrade with cash and not to take out loans. Right now, you have $300,000 in a bank account established for Capital Investments. This account pays 6% interest, compounded annually. A member of the finance department has approached you with an investment opportunity for the $300,000 that covers a five-year period and has the following projected after-tax cash flows: Year Projected Cash Flow 1 $94,000 2 $114,000 3 $134,000 4 $114,000 5 $94,000 Based on this information, answer the following questions: 1) How much money will be in the bank account if you leave the $300,000 alone until you need it in five years? Answer Calculate the compound interest using the formula A=P(1+R)^n Where A= amount at end of period P= the amount you deposit today R= interest rate N= time in years So A= 300,000(1+0.06)^5 A=$ 401,467.67 This means you will have that amount if you leave it in the account after five years. 2) If you undertake the investment opportunity, what is the Nominal Payback Period? Payback Period is the point where the cash inflows are equal to cash outflows i.e. when the investment recoups the initial outlay. Calculating PBP 94,000+114,000+134,000=342,000 Our initial amount will be recovered in the third year i.e the inflows will get to $ 300,000 in year 3 3) Using the factors for 6%, what is the Discounted Payback Period? To calculate discounted PBP we use the formula of compound interest Discounted Cash Inflow = Actual Cash Inflow/(1 + i)n Year 1 2 3 amount 94,000 114,0001.124 134,000 discounting factor discounted amount cumulative cash inflows 1.06 88,679.25 88,679.25 101,423.49 190,102.74 1.191016 112,500.98 302,611.72 From the calculations above, the PBP is in year three after calculating the discounted cash inflows at a rate of 6% 4) What is the Present Value of the benefits from this 5-year investment opportunity? Year inflow-cash PVIF$1=1/(1+r)^n discounted cash flow cumulative cash 1 94,000 0.9434 88,679.25 88,679.25 2 114,0000.8900 101,459.59 190,138.84 3 134,000 0.8396 112,500.98 302,647.82 4 114,0000.7921 90,298.68 392,946.50 5 94,000 0.7473 70,242.27 463,188.77 The present value of total in flows =$ 463,188.77 5) What is the Net Present Value of this opportunity? NPV =Pv cash inflows- Pv Cash out flows = 463,188.77-300,000= 163,188.77 6) If you leave the money in the bank and earn 6% compounded annually, will you have at least $450,000 in 5 years to fund the server and IT upgrades? By how much will you be \"over\" or \"short\" of what you need? If you leave the money in the bank at a compound interest rate of 6% , you will have =$ 401,467.67 which is $ 48,538.33 short. 7) If you undertake the investment, will you have at least $450,000 in 5 years? By how much will you be \"over\" or \"short\"? If you invest in the project after five years you will get $ 463,188.77 which is $ 13,188.77 more. Case Analysis 2 - Weight 30% of total assignment The CEO of Dynamic Manufacturing was at a conference and talked to a supplier about a new piece of equipment for its production process that she believes will produce ongoing cost savings. As the Operations Manager, your CEO has asked for your perspective on whether or not to purchase the machinery. After talking to the supplier and meeting with your Engineers and Financial Analysts, you've gathered the following pieces of data: Cost of Machine: $150,000 Estimated Annual After Tax Savings: $65,000 Estimated machinery life: 3 years (after which there will be zero value for the equipment and no further cost savings) You seem to recall that Dynamic's Finance organization recommends either a 10% or a 15% discount rate for all Cost Savings Projects. You are fairly sure it is 10%. You understand that you need to understand the project financials to ensure that this investment will be economically attractive to Dynamic Manufacturing's shareholders. Calculate the Nominal Payback, the Discounted Payback, the Net Present Value and the IRR assuming: Part A, BASE CASE: 3 year project life, flat annual savings, 10% discount rate Nominal PBP Year Savings accumulated savings 1 65,000 65,000 2. 65,000 130,000 3. 65,000 195,000 To get the exact PBP we assume the $ 65,000 is accrued evenly in the months of the year such that monthly savings =65, 0000/12=5,416.67 For year three we need $ 20,000 to completely get back our initial outlay which will be four months of savings. Our PBP is therefore 2 years and 4 months. Discounted PBP Year Amount PVIF$1=1/(1+r )^n Discounted amount accumulated 1 65,000 1.1 59,090.91 59,090.91 2 65,000 1.21 53,719.00 112,809.91 3 65,000 1.331 48,835.46 161,645.37 The PBP is 150,000-112,809.91=37,190.09 Assuming the 48,835.46 was accrued evenly,37,190.09/4069.62=9.14 The PBP=2 years and 9.1 months. Net Present value Year amount PVIF$1=1/(1+r)^n 0 -150,000 1 1 65,000 1.1 2 65,000 1.21 3 65,000 1.331 NPV= -150,000+161,645.37=11,645.37 discounted amount -150,000 59,090.91 53,719.00 48,835.46 accumulated -150,000 59,090.91 112,809.91 161,645.37 Internal Rate of Return This is the rate at which NPV=0 This rate in this scenario is 14% See excel for calculations Part B. Saving Growth Scenario: BASE CASE but with 10% compounded annual savings growth in years 2 & 3. Cash flows for the poroject Year 0 -150,000 Year 1 65,000 Year 2 78,650 Year 3 86,515 Nominal PBP Year amount accumulative 1 65,000 65,000 2 78,650 143,650 3 86,515 230,165 To get the exact PBP we calculate cumulative earnings for year 3 86,515/12=7,209.58 So the PBP is two years and approximately 1 month Disocunted PBP Year amount 1 65,000 2 78,650 3 86,515 The PBP=65,000/12=5415.67 150,000-124,090.91=25,909.09 25,909.09/5415.67=4.7 PBP = 2 years and 4.7 months discounting factor 1.1 1.21 1.331 amount 59,090.91 65,000 65,000 cumulative 59,090.91 124,090.91 189,090.91 Net Present value Year amount discounting factor 0 -150,000 1 1 65,000 1.1 2 78,650 1.21 3 86,515 1.331 NPV =-150,000+189,090.91=$ 39,090.91 amount -150,000 59,090.91 65,000 65,000 cumulative -150,000 59,090.91 124,090.91 189,090.91 FOR IRR SEE EXCEL 2B Part C, Higher Discount Rate Scenario: 3 year project life, flat annual savings, 15% discount rate Nominal PBP Nominal PBP Year Savings accumulated savings 1 65,000 65,000 2. 65,000 130,000 3. 65,000 195,000 To get the exact PBP we assume the $ 65,000 is accrued evenly in the months of the year such that monthly savings =65, 0000/12=5,416.67 For year three we need $ 20,000 to completely get back our initial outlay which will be four months of savings. Our PBP is therefore 2 years and 4 months. Discounted PBP Year amount 1 65,000 2 65,000 3 65,000 discounting factor 1.15 1.3225 1.52088 amount-discounted 56,521.74 49,149.34 42,738.41 cumulative 56,521.74 105,671.08 148,409.49 With this option, we do not meet the amount to get PBP. NPV Year amount discounting factor 0 -150,000 1 1 65,000 0.8696 2 65,000 0.7561 3 65,000 0.6575 NPV=-150,000+148,408=-1,592 amount discounted -150,000 56,524 49,146.5 42,737.5 cumulative -150,000 93,476 105,670.5 148,408 IRR see excel 2c Rate=14% Part D, 5 Year Equipment Life:5 year project life, flat annual savings, 10% discount rate Nominal PBP Year amount cumulative amount 1 65,000 65,000 2 65,000 130,000 3. 65,000 195,000 To get the exact PBP we assume the $ 65,000 is accrued evenly in the months of the year such that monthly savings =65, 0000/12=5,416.67 For year three we need $ 20,000 to completely get back our initial outlay which will be four months of savings. Our PBP is therefore 2 years and 4 months. Discounted PBP year 0 1 2 3 4 5 discounting discounted cumulative amount factor amount amount 150,000 1 -150000 -150000 65,000 0.909091 59090.91 59090.91 65,000 0.826446 53719.01 112809.9 65,000 0.751315 48835.46 161645.4 65,000 0.683013 44395.87 206041.3 65,000 0.620921 40359.89 246401.1 PBP= 3 years NPV discounting discounted amount factor amount cumulative amount 0 150,000 1 -150000 -150000 1 65,000 0.909091 59090.91 59090.91 2 65,000 0.826446 53719.01 112809.9 3 65,000 0.751315 48835.46 161645.4 4 65,000 0.683013 44395.87 206041.3 5 65,000 0.620921 40359.89 246401.1 NPV = 96,401.14 year IRR=33% REFER TO EXCEL SHEET NPVIRR Discussion - in a Word Document in paragraph form, respond to the following: 1) From a Financial perspective, would you recommend this purchase to Management? Which scenario would you present and why? I would recommend option D, this is because it has a shorter PBP, higher NPV and higher IRR 2) In your opinion, which scenario is the most aggressive? If you were to select this scenario as the basis for your proposal, how would you justify the more aggressive economics? The most aggressive option is B where we have to compound the cash inflows for years 2 and three. This would require having the inflows re-invested immediately after being realized. 3) In SIMPLE English (as in talking to a non-Finance and non-MBA person), explain why there was a difference in outcome between Part A and Part B. The difference between option A and B is that we are compounding the acquired earnings from the project making the earnings for part B higher than those in A. 4) Beyond Financial measures, what other considerations would you want to consider, before making a recommendation to Management? Other factors to consider include. o Current economic conditions o Likely changes in technology o Government regulations o Tax changes Case Analysis 3 - Weight 40% of total assignment You are the General Manager at the Bicker, Slaughter and Lynch Law Firm. There is an opportunity to buy out a small law firm that was just started by a young MBA/JD and you believe the firm can be grown and become a lucrative part of your Firm. With help from your Finance leader, you have estimated the following benefit streams for this new division: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Before Tax Cash Flow From Operations $(149,000) $- $51,380 $88,760 $114,100 $129,780 $143,640 $167,300 After Tax Net Income From Operations $(103,500) $(50,500) $36,700 $63,400 $81,500 $92,700 $102,600 $119,500 After Tax Cash Flow From Operations $(85,600) $15,000 $48,600 $72,200 $95,550 $101,300 $125,200 $140,200 You estimate that the purchase price for this firm would be $200,000 and that additional net working capital would be needed in the amount of $60,000 in year 0, an additional $20,000 in year 2 and then $20,000 in year 5. In addition to the purchase price, you would ask that your Advertising budget of $275,000 be increased by an incremental one time amount of $50,000 in advertising in year 0 to publicize the firm's expansion. Your Finance leader has indicated that the firm has access to a credit line and could borrow the funds at a rate of 6%. (Assume the cash associated with this interest is included in the above benefit numbers). He also mentions that when he runs Project economics for Capital budgeting (such as a new copier or a company car), he recommends a standard 10% rate discount but the one other time they looked at an acquisition of a smaller firm he used a 12% rate discount. At the end of 8 years, the plan will be to sell this division. The estimated terminal value (the sale and the return of working capital) is conservatively estimated to be $300,000 of cash flow help. Calculate the N Nominal Payback, the Discounted Payback, the Net Present Value and the IRR for this potential acquisition. calculating the nominal PBP YEAR AMOUNT CUMMULATIVE AMOUNT 0 -585,000 -585,000 5 -20,000 -605,000 1 -85,000 -85,000 2 15,000 -70,000 3 48,600 -21,400 4 72,200 50,800 5 95,550 146,350 6 101,300 247,650 7 125,200 372,850 8 140,200 513,050 from the above cumulative cash flow from operations we do not have a PBP PBP 513,050 is less than the initial amount of 605,000 calculating the discounted PBP discounting factor 1/ YEAR amount (1+r)^n 0 (585,000.00) discounted amount cumulative amount 1 (585,000.00) (585,000.00) 5 (20,000.00) 0.567427 (11,348.54) (596,348.54) 1 (85,000.00) 0.892857 (75,892.86) (75,892.86) 2 15,000.00 0.797194 11,957.91 (63,934.95) 3 48,600.00 0.71178 34,592.52 (29,342.43) 4 72,200.00 0.635518 45,884.41 16,541.98 5 95,500.00 0.567427 54,189.26 70,731.24 6 101,300.00 0.506631 51,321.73 122,052.97 7 125,200.00 0.452349 56,634.12 178,687.10 8 140,200.00 0.403883 56,624.43 235,311.52 8 300,000.00 total 0.403883 121,164.97 356,476.49 (370,717.47) The discounted PBP is not achieved by our cash inflows from operations. Calculating NPV calculating the discounted NPV 9discounting factor 1/ YEAR amount (1+r)^n 0 (585,000.00) discounted amount cumulative amount 1 (585,000.00) (585,000.00) 5 (20,000.00) 0.567427 (11,348.54) (596,348.54) 1 (85,000.00) 0.892857 (75,892.86) (75,892.86) 2 15,000.00 0.797194 11,957.91 (63,934.95) 3 48,600.00 0.71178 34,592.52 (29,342.43) 4 72,200.00 0.635518 45,884.41 16,541.98 5 95,500.00 0.567427 54,189.26 70,731.24 6 101,300.00 0.506631 51,321.73 122,052.97 7 125,200.00 0.452349 56,634.12 178,687.10 8 140,200.00 0.403883 56,624.43 235,311.52 8 300,000.00 total 0.403883 121,164.97 356,476.49 (370,717.47) NPV=-370,717.47 CALCULATING THE IRR IRR=4% See the workings in excel for question three sheet Discussion - in a Word Document in paragraph form, respond to the following: 1) From a Financial perspective, would you recommend this purchase to Management? Why? No, the project seems very much not viable with a negative NPV and low IRR not forgetting the lack of PBP. 2) What are some of the non-financial elements that would change your initial recommendation made in question #1. o The length to undertake the project o The changes in economic conditions o Additional tax benefits 3) Assumptions in Project Economics can have a huge impact on the result. Identify 3 elements/assumptions in your analysis that would make this project not be financially attractive? (E.g. Answer the question, what would have to be true for this to be a bad investment?) The NPV is below zero The rate of return is low The PBP is not achieved