(11-4) Although the Chen Company%u2019s milling machine is old it is still in

(11-4) Although the Chen Company%u2019s milling machine is old it is still in relatively good working

order and would last for another 10 years. It is inefficient compared to modern standards

though and so the company is considering replacing it. The new milling machine at a

cost of $110000 delivered and installed would also last for 10 years and would produce

after-tax cash flows (labor savings and depreciation tax savings) of $19000 per year. It

would have zero salvage value at the end of its life. The firm%u2019s WACC is 10% and its

marginal tax rate is 35%. Should Chen buy the new machine?

(11-6) The Campbell Company is considering adding a robotic paint sprayer to its

production line. The sprayer%u2019s base price is $1080000 and it would cost another

$22500 to install it. The machine falls into the MACRS 3-year class and it would be

sold after 3 years for $605000. The MACRS rates for the first three years are 0.3333

0.4445 and 0.1481. The machine would require an increase in net working capital

(inventory) of $15500. The sprayer would not change revenues but it is expected to

save the firm $380000 per year in before-tax operating costs mainly labor.

Campbell%u2019s marginal tax rate is 35%.

a. 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. Based on your IRR analysis if the project%u2019s cost of capital is 12% should the machine be purchased?

Chapter 12 Problems

(12-1) Broussard Skateboard%u2019s sales are expected to increase by 15% from $8 million in

2013 to $9.2 million in 2014. Its assets totaled $5 million at the end of 2013.

Broussard is already at full capacity so its assets must grow at the same rate as

projected sales. At the end of 2013 current liabilities were $1.4 million consisting

of $450000 of accounts payable $500000 of notes payable and $450000 of

accruals. The after-tax profit margin is forecasted to be 6% and the forecasted

payout ratio is 40%. Use the AFN equation to forecast Broussard%u2019s additional funds

needed for the coming year.

(12-8) Stevens Textiles%u2019s 2013 financial statements are shown here:

Balance Sheet as of December 31 2013 (Thousands of Dollars)

Cash $ 1080 Accounts payable $ 4320

Receivables 6480 Accruals 2880

Inventories 9000 Line of credit 0

Total current assets $16560 Notes payable 2100

Net fixed assets 12600 Total current liabilities $ 9300

Mortgage bonds 3500

Common stock 3500

______ Retained earnings 12860

Total assets $29160 Total liabilities and equity $ 29160

Income Statement for December 31 2013 (Thousands of Dollars)

Sales $36000

Operating costs 32440

Earnings before interest and taxes $ 3560

Interest 460

Pre-tax earnings $ 3100

Taxes (40%) 1240

Net income $ 1860

Dividends (45%) $ 837

Addition to retained earnings $ 1023

a. Suppose 2014 sales are projected to increase by 15% over 2013 sales. Use the

forecasted financial statement method to forecast a balance sheet and income

statement for December 31 2014. The interest rate on all debt is 10% and cash

earns no interest income. Assume that all additional debt in the form of a line of

credit is added at the end of the year which means that you should base the

forecasted interest expense on the balance of debt at the beginning of the year. Use

the forecasted income statement to determine the addition to retained earnings.

Assume that the company was operating at full capacity in 2013 that it cannot sell

off any of its fixed assets and that any required financing will be borrowed as

notes payable. Also assume that assets spontaneous liabilities and operating costs

are expected to increase by the same percentage as sales. Determine the additional

funds needed.

b. What is the resulting total forecasted amount of the line of credit?