90.2K

Verified Solution

Link Copied!

Case $7$ Robert Montoya, Inc. $($revised$)$

$($also cited as Case $14$ in original casebook$)$

Topic $$ Cash Flow Estimation

$(16$th edition $$ textbook$)$

On page $29$ in the casebook, change $2,200,000$ to $1,800,000($new machinery cost$)$ and change $150,000$ to $200,000($salvage value$).$ On page $30,$ change $40$ to $50($price$)$ and $32$ to $30($costs$).$ These revisions will change most of the numbers in Table $1.$

Omit $7,8,9,10,11,12.$

Textbook examples $/$ definitions $/$ information on pages $360-4($Chapter $$ Section $10-$first two$-$page introduction $12),424(12-1$ C$)$

$425(12-1$E$)$

$425(12-1$F$)$

Please fill in Xs in Table $1.427-30(12-2).$ Change in NWC $($net working capital$)=$ inventories. Price $+$ freight $+$ installation $+$ change in NWC $=$ net investment outlay $=$ project NCF $($net cash flow$)$ at year $0.$ Salvage value X tax rate $=$ SV $($salvage value$)$ tax in year $4.$ Salvage value $$ SV tax $+$ recovery of NWC $=$ termination CF $($cash flow$).$ Net op $($operating$)$ cash flow $+$ termination CF $=$ project NCF$.$

Press CE$/$C to clear $1$ number on screen of Texas Instrument Ba II Plus Financial calculator. If you ever need to clear CFs $($cash flows$),$ etc. in your calculator, press $2$nd $($to get yellow above key functions$)+$I$-(1$ key$)($reset$)$ ENTER $($set$)2$nd CPT $($quit$).$

Fill in Xs$.393-8(11-23),409-10(11-8),427-30(12-2).$ Payback period of S $=$ about $2$ years, L $=$ about $3$ years. Omit MIRR.

Depreciable basis $=$ price $+$ freight $+$ installation. In year $1,2,000,000$ X $33\%($or $0\mathrm{.}33)$ MACRS factor $=660,000($depreciation expense$).2,000,000660,000=1,340,000$ end$-$of$-$year book value.

Table $1$

MACRS Depr. End$-$of$-$year

Year Factor Expense Book Value

$133\%$ $$660,000$ $$1,340,000$

$2$ X X X

$3$ X X X

$47140,0000$

$100\%2,000,000$

See years $1$ and $4$ as examples in Table $1.$ In year $1,50$ X $100,000=5,000,0003,000,000(100,000$ X $30)660,000-20,000=1,320,000528,000=792,000+660,000=1,452,000=$ project NCF

Cash Flow Statements:

Year $0$ Year $1$ Year $2$ Year $3$ Year $4$

Unit price $ $50$ X X $ $50$

Unit sales $100,000$ X X $100,000$

Revenues $5,000,000$ X X $5,000,000$

Operating costs $3,000,000$ X X $3,000,000$

Depreciation $660,000$ X X $140,000$

Other project effects $20,000$ X X $20,000$

Before tax income $1,320,000$ X X $1,840,000$

Taxes $528,000$ X X $736,000$

Net income $792,000$ X X $1,104,000$

Plus depreciation $660,000$ X X $140,000$

Net op cash flow $1,452,000$ X X $1,244,000$

Salvage value $200,000$

SV tax X

Recovery of NWC X

Termination CF X

Project NCF $($$$-2,100,000)$ X X X X

$=============$

Example: see Project S numbers in Table $11\mathrm{.}1$ on page $394(11-2)-$with your financial calculator, press CF $1000+$I$-(1$ keystroke $-$ to make it negative$)$ ENTER down arrow key $($I could not find a symbol$)500$ ENTER down arrow key down arrow key $400$ ENTER down arrow key down arrow key $300$ ENTER down arrow key down arrow key $100$ ENTER down arrow key down arrow key NPV $10$ ENTER down arrow key CPT $($textbook $($not case$)$ answer $=$ $$78\mathrm{.}82$ pages $393-6(11-2))$ IRR CPT $($answer $=14\mathrm{.}49\%-$ pages $396-396-8(11-3)).$Note that case has termination cash flows in year $4,$ etc. you need to make adjustments

Answer & Explanation Solved by verified expert

See Answer