Solution and Answer
Solution and Answer
1. Jonhson Products is considering purchasing a new milling machine that costs $100,000. The
machine’s installation and shipping costs will total $2,500. If accepted, the milling machine
project will require an initial net working capital investment of $20,000. Johnson plans to
depreciate the machine on a straight-line basis over a period of 8 years about a year ago, Jonhson
paid $10,000 to a consulting firm to conduct a feasibility study of the new milling machine.
Jonhson’s marginal tax rate is 40 percent.
a. Calculate the project’s net investment (NINV)
Solution and Answer:
New milling machine cost $100,000
Machine’s installation and shipping costs 2,500
Net working capital investment 20,000
= $2,500 / 8 years
2. A new machine costing $100,000 is expected to save the MchKaig Brick Company $15,000 per
year for 12 years before depreciation and taxes. The machine will be depreciated on a straight-
line basis for a 12-year period to an estimated salvage value of $0. The firm’s marginal tax rate is
40 percent. What are the annual net cash flows associated with the purchase of this machine?
Also compute the net investment (NINV) for this project.
Solution and Answer:
Annual Net Cash Flow:
Annual Depreciation = $100,000 / 12
= $8,333
NCF = (Revenues – Operation Expenses – Depreciation) (1 – Tax) + Depreciation
= ($0 – (- $15,000) - $8,333) (1 – 0.4) + $8,333
Annual Net Cash Flow = $12,333
Net Investment = $100,000
MODULE 10
1. Use the percentage of sales forecasting method to compute the additional financing needed
by Lambrechts Specialty Shops, Inc. (LSS), if sales are expected to increase from a current level of
$20 million to a new level of $25 million over the coming year. LSS expects earnings after taxes
to equal $1 million over the next year. LSS intends to pay a $300,000 dividend next year. The
current year balance sheet for LSS is as follows:
Lambrechts Specialty Shops, Inc.
Balance Sheet as of December 31, 20X3
All assets, except “cash”, are expected to vary proportionately with sales. Of total liabilities and
equity, only “accounts payable” is expected to vary proportionately with sales.
2. Prepare a cash budget for Atlas Products, Inc. for the first year of 20X2, based on the following
information.
The budgeting section of the corporate finance department of Atlas Products has received
the following sales estimates from the marketing department:
The company has found that, on average, about 25 percent of its credit sales are collected
during the month when the sale is made, and the remaining 75 percent of credit sales are
collected during the month following the sale. As a result, the company uses these figures for
budgeting.
The company estimates its purchases at 60 percent of next month’s sales, and payment
for those purchases are budgeted to lag the purchases by 1 month.
In addition, a tax payment of $105,000 is due on January 15, and $40,000 in dividends will
be declared in January and paid in March. Also, the company has ordered a $75,000 piece of
equipment. Delivery is scheduled for early January; and payment will be due in February.
The company’s projected cash balance at the beginning of January is $100,000, and the
company desires to maintain a balance of $100,000 at the end of each month.
Answer:
Cash Budget Worksheet
December January February March
Budget of Receipts from Sales
Estimated Sales $825,000 $730,000 $840,000 $920,000
Estimated Credit Sales 770,000 690,000 780,000 855,000
Estimated Receipts
Cash Sales 40,000 60,000 65,000
Collections of Accounts
Receivables
75% of Last Month’s Credit 577,500 517,500 585,000
Sales
25% of Current Mont’s Credit 172,500 195,000 213,750
Sales
Total Accounts Receivable $750,000 $712,500 $798,750
Collections
Budget of Payments for
Purchases
Estimated Purchases 438,000 504,000 552,000
Estimated Payments of $438,000 $504,000 $552,000
Accounts Payable