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Chapter 11 Problems

Complete problems 2, 3, and 6 in chapter 11 of the textbook.

Please show all work for each problem.

Chapter 12 Problems

Complete problems 1, 2, 3, 4, and 6 in chapter 12 of the textbook.

Please show all work for each problem.

Please put in excel file and put each number in its own tab. Due Sunday

2

Cairn Communications is trying to estimate the first-year operating cash flow

(at t = 1) for a proposed project. The financial staff has collected the following information:

The company faces a 40% tax rate. What is the project’ s operating cash flow for the first year (t = 1)?

3.

Allen Air Lines is now in the terminal year of a project. The equipment originally cost $20 million, of which 80% has been depreciated. Carter can sell the used equipment today to another airline for $5 million, and its tax rate is 40%. What is the equipment’ s after-tax net salvage value?

6.

The Campbell Company is evaluating the proposed acquisition of a new milling machine.

The machine’ s base price is $108,000, and it would cost another $12,500 to modify it for special use. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The machine would require an increase in net working capital (inventory) of $5,500. The milling machine would have no effect on revenues, but it is expected to save the firm $44,000 per year in before-tax operating costs, mainly labor. Campbell’ s marginal tax rate is 35%.

a. What is the net cost of the machine for capital budgeting purposes?

(That is, what is the Year-0 net cash flow?)

b. What are the net operating cash flows in Years 1, 2, and 3?

c. What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)?

d. If the project’ s cost of capital is 12%, should the machine be purchased?

Chapter 12

1.

Baxter Video Products’ s sales are expected to increase by 20% from $5 million in 2010 to $6 million in 2011. Its assets totaled $3 million at the end of 2010. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales.

At the end of 2010, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%.

Use the AFN equation to forecast Baxter’ s additional funds needed for the coming year.

2.

Refer to Problem 12-1. What would be the additional funds needed if the company’ year-end 2010 assets had been $4 million? Assume that all other numbers, including sales, are the same as in Problem 12-1 and that the company is operating at full capacity.

Why is this AFN different from the one you found in Problem 12-1? Is the company’ s “ capital intensity” ratio the same or different?

3.

Refer to Problem 12-1. Return to the assumption that the company had $3 million in assets at the end of 2010, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why is this AFN different from the one you found in Problem 12-1?

4.

Bannister Legal Services generated $2,000,000 in sales during 2010, and its year-end total assets were $1,500,000. Also, at year-end 2010, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accruals. Looking ahead to 2011, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 5%, and its payout ratio will be 60%. How large a sales increase can the company achieve without having to raise funds externally; that is, what is its self-supporting growth rate?

6.

The Booth Company’ s sales are forecasted to double from $1,000 in 2010 to $2,000 in 2011. Here is the December 31, 2010, balance sheet:

Booth’ s fixed assets were used to only 50% of capacity during 2010, but its current assets were at their proper levels in relation to sales. All assets except fixed assets must increase at the same rate as sales, and fixed assets would also have to increase at the same rate if the current excess capacity did not exist. Booth’ s after-tax profit margin is forecasted to be 5% and its payout ratio to be 60%. What is Booth’ s additional funds needed (AFN) for the coming year?