FIN-450 Week 1 Chapter 11 Practice Problems - P11-4, P11-8, P11-17, & P11-23

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FIN-450 Week 1 Chapter 11 Practice Problems - P11-4, P11-8, P11-17, & P11-23

Intermediate Finance - Basic Concepts in Finance

Grand Canyon University

Complete the following problems from Chapter 11 in the textbook:

1. P11-4

2. P11-8

3. P11-17

4. P11-23

1. Do all work in Excel. Do not submit Word files or *.pdf files.

2. Submit a single spreadsheet file for this assignment. Do not submit multiple files.

3. Place each problem on a separate spreadsheet tab.

You are not required to submit this assignment to Turnitin. Complete the following problems from Chapter 11 in the textbook:

1.   P11-4 Sunk costs and opportunity costs Masters Golf Products, Inc., spent 3 years and \$1,000,000 to develop its new line of club heads to replace a line that is becoming obsolete. To begin manufacturing them, the company will have to invest \$1,800,000 in new equipment. The new clubs are expected to generate an increase in operating cash inflows of \$750,000 per year for the next 10 years. The company has determined that the existing line could be sold to a competitor for \$250,000.

a. How should the \$1,000,000 in development costs be classified?

b. How should the \$250,000 sale price for the existing line be classified?

c.  Depict all the known relevant cash flows on a time line.

2.  P11-8 Book value and taxes on sale of assets Troy Industries purchased a new machine 3 years ago for \$80,000. It is being depreciated under MACRS with a 5-year recovery period using the percentages given in Table 4.2 on page 000. Assume a 40% tax rate.

a. What is the book value of the machine?

b. Calculate the firm’s tax liability if it sold the machine for each of the following amounts: \$100,000; \$56,000; \$23,200; and \$15,000. The company is liable for 29% of the taxes after 3 years.

3. P11-17 Incremental operating cash flows Richard and Linda Thomson operate a local lawn maintenance service for commercial and residential property. They have been using a John Deere riding mower for the past several years and believe that it is time to buy a new one. They would like to know the incremental (relevant) cash flows associated with the replacement of the old riding mower. The following data are available: There are 5 years of remaining useful life on the old mower. The old mower has a zero book value. The new mower is expected to last 5 years. The Thomsons will follow a 5-year MACRS recovery period for the new mower. Depreciable value of the new mower is \$1,800. They are subject to a 40% tax rate. The new mower is expected to be more fuel efficient, maneuverable, and durable than previous models and can result in reduced operating expenses of \$500 per year. The Thomsons will buy a maintenance contract that calls for annual payments  \$120. Create an incremental operating cash flow statement for the replacement of Richard and Linda’s John Deere riding mower. Show the incremental operating cash flow for the next 6 years.

4.    P11-23 Relevant cash flows for a marketing campaign Marcus Tube, a manufacturer of high-quality aluminum tubing, has maintained stable sales and profits over the past 10 years. Although the market for aluminum tubing has been expanding by 3% per year, Marcus has been unsuccessful in sharing this growth. To increase its sales, the firm is considering an aggressive marketing campaign that centers on regularly running ads in all relevant trade journals and web sites and exhibiting products at all major regional and national trade shows. The campaign is expected to require an annual tax-deductible expenditure of \$150,000 over the next 5 years. Sales revenue, as shown in the accompanying income statement for 2015, totaled \$20,000,000. If the proposed marketing campaign is not initiated, sales are expected to remain at this level in each of the next 5 years, 2016 through 2020. With the marketing campaign, sales are expected to rise to the levels shown in the accompanying table for each of the next 5 years; cost of goods sold is expected to remain at 80% of sales;  general and administrative expense (exclusive of any marketing campaign outlays) is expected to remain at 10% of sales; and annual depreciation expense is expected to remain at \$500,000. Assuming a 40% tax rate, find the relevant cash flows over the next 5 years associated with the proposed marketing campaign.

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