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COMPREHENSIVE CHAPTER 12 & 13 PROBLEMS MONARCH CORPORATION IS GOING TO START A NEW PRODUCT LINE OF PRODUCTS IN A WHOLE NEW MARKET. THE DATA FOR ANALYSIS IS PRESENTED BELOW: COST OF THE EQUIPMENT NEEDED $194,000 FIVE YEAR PROPERTY FOR TAX DEPRECIATION NEW WORKING CAPITAL NEEDS $50,000 WILL BE RECOVERED AT THE END OF THE THIRD YEAR PROJECTED NEW REVENUES: SALES PROBABILITY $200,000 30% $250,000 50% $300,000 20% COST OF GOOD SOLD 30% OF SALES VARIABLE CASH COSTS 10% OF SALES ANNUAL FIXED CASH COSTS: RENT $50,000 CLEANING $20,000 MAINTENANCE & OTHER $10,000 TOTAL FIXED COSTS $80,000 EQUIPMENT DISPOSAL PROCEEDS $19,400 SALVAGE VALUE AT THE END OF YEAR 6 FIRM’S COST OF CAPITAL 12.00% TAX RATE 35% NOTE – WHEN COMPUTING TAX, A NET LOSS FOR THE YEAR MEANS A POSITIVE TAX SAVINGS IS CREATED SINCE THERE IS OTHER INCOME TAX ON OTHER INCOME TO OFFSET. DEPRECIATION RATES FOR TAX PURPOSES: YEAR ONE 20.00% YEAR TWO 32.00% YEAR THREE 19.20% YEAR FOUR 11.50% YEAR FIVE 11.50% YEAR SIX 5.80% ASSUMPTIONS: ALL CASH FLOWS IN YEARS 1-6 OCCUR AT THE END OF THE YEAR. ALL INITIAL CASH INFLOWS OR OUTFLOWS OCCUR TODAY. REQUIRED: A. ASSUMING SALES ARE $200,000 COMPUTE THE PAYBACK, IRR AND NPV. FOR THE NPV, COMPUTE AT BOTH THE FIRM’S DISCOUNT RATE AND 16%, WHICH IS A 4% PREMIUM ADDED TO THE RATE. B. COPY THE WHOLE WORKSHEET AND SOLUTIONS FOR PART A TO THE WORKSHEET NAMED PART B, AND REDO THE COMPUTATIONS BY CHANGING THE ANNUAL SALES TO $250,000. C. COPY THE WHOLE WORKSHEET AND SOLUTIONS FOR PART A TO THE WORKSHEET NAMED PART C, AND REDO THE COMPUTATIONS BY CHANGING THE ANNUAL SALES TO $300,000.
