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REVISION-TCDN

Monila’s Dinor can grow by 6.38% before needing new fixed assets, with current sales at $611,000 and full capacity sales at $650,000. Precision Tool's analysis shows a negative net advantage to leasing equipment, indicating it is better to buy. Precise Machinery's project analysis reveals various financial metrics, including an operating cash flow of $330,500 under certain conditions.

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18 views

REVISION-TCDN

Monila’s Dinor can grow by 6.38% before needing new fixed assets, with current sales at $611,000 and full capacity sales at $650,000. Precision Tool's analysis shows a negative net advantage to leasing equipment, indicating it is better to buy. Precise Machinery's project analysis reveals various financial metrics, including an operating cash flow of $330,500 under certain conditions.

Uploaded by

chunychina28
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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1.

Monila’s Dinor is operating at 94 percent of its fixed asset capacity and has
current sales of $611,000. How much can the firm grow before any new fixed
assets are needed?
Solution
We divide the current sales ($611,000) by the fixed asset capital (94%). The
full capacity sales is $650,000.
 Full capacity sales= $611,000 / 94% = $650,000
Let us find the difference between the full capacity sales ($650,000) and the
current sales ($611,000). The difference is $39,000.
 Difference = $650,000 - $611,000 = $39,000

We divide the difference ($39,000) by the current sales ($611,000). The firm
can grow at 6.38% before any new fixed assets are needed.

 Growth= $39,000 / $611,000 = 6.38%

2. Precision Tool is trying to decide whether to lease or buy some new


equipment costs $1.2 million has a 7-year life, and will be worthless after the
7 years. The pre-tax cost of borrowed funds is 8 percent and the tax rate is 32
percent. The equipment can be leased for $242,500 a year. What is the net
advantage to leasing and what will be the decision to buy or lease?
Solution

After-Tax lease payment = ($242,500) * (1 - 0.32) = $164,900


Annual Depreciation Tax-Shield = ($1,200,000/7) * (0.32) = $54,857.14
After-Tax Discount Rate = 0.08 * (1 - 0.32) = 5.44%
Net Advantage to Leasing = $1,200,000 - ($164,900 + $54,857.14) * (PVIFA 5.44%,
7)

1,200,000 - (219,757.14)*(1-(1/1.0544)^7)/0.0544 = -$51,566

Since NAL is negative we can say that it is better to buy than leasing

3. Precise Machinery is analyzing a proposed project. The company expects to


sell 2,100 units, give or take 5 percent. The expected variable cost per unit is
$260 and the expected fixed costs are $589,000. Cost estimates are
considered accurate within a plus or minus 4 percent range. The depreciation
expense is $129,000. The sales price is estimated at $775 per unit, give or
take 2 percent. The tax rate is 34 percent. The company is conducting
sensitivity analysis with fixed costs of $590,000. What is the OCF given this
analysis?

4. The Bear Rug has sales of $811,000. The cost of goods sold is equal to 63
percent of sales. The beginning accounts receivable balance is $41,000 and
the ending accounts receivable balance is $38,000. How long on average
does it take the firm to collect its receivable?
Solution

Average receivable: ( $41,000 + 38,000)/2 = 39,500


Receivable Turnover = 811,000/ 39,500= 20,5316 times
Receivable period : 365/ 20,5316 = 17.78 days
It takes 17.78 days to collect its receivable

Average Collection Period= Average Debtors/Sales *365


=Average Debtors= (41000+38000)/2
=39500
therefore, 39500/811000*365
=17.78 days
5. Precise Machinery is analyzing a proposed project. The company expects to
sell 2,100 units, give or take 5 percent. The expected variable cost per unit is
$260 and the expected fixed costs are $589,000. Cost estimates are
considered accurate within a plus or minus 4 percent range. The depreciation
expense is $129,000. The sales price is estimated at $750 per unit, plus or
minus 2 percent.
a) What is the sales revenue under the worst case scenario?
- Sales; Worst case = (2,100 0.95) ($750 .98) = $1,466,325
b) What is the contribution margin per unit under the best case scenario?
- Contribution margin; best case = ($750 1.02) - ($260 0.96) = $515.40
c) What is the amount of the total costs per unit under the worst case
scenario?
- Total costs per unit; worst case =
[($2,100 0.95) (260 1.04) + ($589,000 1.04)]/(2,100 0.95) = $577.45
d) The tax rate at Precise Machinery is 35 percent. The company is
conducting a sensitivity analysis on the sales price using a sales price
estimate of $755. What is the operating cash flow based on this analysis?
- OCF {[(755 - $260) 2,100] - $589,000} {1 - 0.35} + ($129,000 0.35) =
$337,975
e) The company is conducting a sensitivity analysis with fixed costs of
$590,000. What is the OCF given this analysis?
- OCF {[(750 - $260) 2,100] - $590,000} {1 - 0.35} + ($129,000 0.35) =
$330,500

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