3 Questions , Homework, & Quiz

Please complete the attached 3 questions  and homework/quiz on pearson. Thank you

1

Week 5 – Assignment Problems

P1. MACRS depreciation expense and accounting cash flow

Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pre-tax income of $430,000 this year. The company’s financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of $80,000 and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule.

a. If the firm purchases the grinders before year end, what depreciation expenses will it be able to claim this year? (Use Table 10.4 on page 308 of the Brooks text, and you can round the percentages to the nearest, e.g., 33.33% to 33%).

b. If the firm reduces its reported income by the amount of the depreciation expense calculated in part a, what tax savings will result?

c. Assuming that Pavlovich does purchase the grinders this year and that they are its only depreciable asset, use the accounting definition given by the Equation:

FCF = OCF – Net fixed asset investment (NFAI) – Net current asset investment (NCAI)

to find the firm’s cash flow from operations for the year.

Where:
OCF = [EBIT x (1-T)] + Depreciation

NFAI = change in net fixed assets + Depreciation

NCAI = change in current assets – change in (accounts payable + accruals)

P2. Finding operating and free cash flows

Consider the following balance sheets and selected data from the income statement of Keith Corporation, then prepare answers for the accompanying questions:

Keith Corporation Balance Sheets

Assets	12/31/ 200 9	12/31/2008
Cash		$ 1,500	$ 1,000
Marketable securities	1,800	1,200
Accounts receivable	2,000	1,899
Inventories	2,900			2,800
Total current assets	$ 8,200	$ 6,800
Gross fixed assets	$ 29,500	$ 28,100
Less: Accumulated depreciation	14,700	13,100
Net fixed assets	$ 14,800	$ 15,100
Total assets		$ 23,000		$ 21,800

Liabilities and Stockholder’s Equity

$ 1,500

2,800

5,000

$ 10,000

2,800

$ 23,000

$ 21,800

Accounts payable	$ 1,600
Notes payable	2,200
Accruals	200	300
Total current liabilities	$ 4,600	$ 4,000
Long-term debt		5,000
Total liabilities	$ 9,600	$ 9,000
Common stock		$ 10,000
Retained earnings	3,400
Total stockholder’s equity	$ 13,400	$ 12,800
Total liabilities and owners equity

Keith Corporation Income Statement Data (2109)

Depreciation expense	$ 1,600
Earnings before interest and taxes	2,700
Interest expense	367
Net profits after taxes	1,400
Tax rate	40%

a. Calculate the firm’s accounting cash flow from operations for the year ended December 31, 2009, using: Cash flow from operations = net profits after tax + depreciation

b. Calculate the firm’s net operating profit after taxes (NOPAT) for the year ended December 31, 2009, using Equation: NOPAT = EBIT x (1 – T)

c. Calculate the firm’s operating cash flow (OCF) for the year ended December 31, 2009, using Equation: OCF = NOPAT + Depreciation

d. Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2009, using the Equation in P1, above.

e. Interpret, compare, and contrast your cash flow estimates in parts a, c, and d.

P3. Cash budget – Basic

Grenoble Enterprises had sales of $50,000 in March and $60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and $100,000, respectively. The firm has a cash balance of $5,000 on May 1 and wishes to maintain a minimum cash balance of $5,000. Given the following data, prepare and interpret a cash budget for the months of May, June, and July.

1) The firm makes 20% of sales for cash, 60% are collected in the next month, and the remaining 20% are collected in the second month following sale.

2) The firm receives other income of $2,000 per month.

3) The firm’s actual or expected purchases, all made for cash, are $50,000, $70,000, and $80,000 for the months of May through July, respectively.

4) Rent is $3,000 per month.

5) Wages and salaries are 10% of the previous month’s sales.

6) Cash dividends of $3,000 will be paid in June.

7) Payment of principal and interest of $4,000 is due in June.

8) A cash purchase of equipment costing $6,000 is scheduled in July.

9) Taxes of $6,000 are due in June.