ManeEvent Finance Assingment Help With Solution

ManeEvent Finance Assingment Help With Solution

Question 1 ______________________________________________________________________________________________________
Apple Computer is introducing a new product line, the Apple Watch. Apple expects that it will sell 6
million units in Year 1, and 15% more per year in years 2 and 3. It projects that unit volume will grow at 12% per year in years 4 and 5. Revenue per unit is projected at $335 for years 1 – 3; it is projected to fall to $303 for the final two years of this innovative project’s 5-year life. The production equipment is a 5-year asset according to MACRS and will be depreciated down to zero over its life. Operating costs are estimated to remain at 60% of the selling price per unit throughout the life of this project.

 
Apple also needs to purchase $402 million in inventory to prepare for this project. Each year, Apple
will maintain its total net working capital investment at 20% of the following year’s revenue. All net
working capital will be recovered in full at the end of the project’s life. Apple expects to invest $1.85 billion up front for manufacturing equipment and special tooling, in order to pursue the Apple Watch manufacturing project. Assume that this equipment and tooling will be sold at a market value of $39.7 million at the end of the project. Assume that Apple’s corporate tax rate is 40%, and that Apple’s required rate of return for new products is 19.4%.

 
a) Should Apple proceed with the project? Build a complete model using the OCF/FCF template.
 
b) Share price: Before the announcement of this project, assume Apple’s share price was $121.78.
Assuming the firm has 1.2 billion shares outstanding, what will the new share price be as a result of
the Apple Watch project being announced

 
Question 2 _______________________________________________________________________________________________________
ManeEvent produces products for horse riders and horse lovers. ManeEvent’s management is deciding
when to replace its classic saddle-stitching machine, used to create leather horse saddles. The machine’s current market value is $2.5 million; its current book value is $1.4 million. If not sold, the old saddlestitching machine will require maintenance costs of $460,000 at the end of the year for the next five years.

Depreciation on the old machine is $280,000 per year. At the end of five years, the old saddle-stitching machine will have a salvage value of $374,000 and a book value of $0; the company believes it will be sold for its salvage value.
 
As an alternative to keeping the old machine, a new, high-end leather stitcher could be purchased for
$2.65 million. Its annual maintenance costs are much lower, at $375,000 annually during its economic life of five years. It will be fully depreciated to zero by the straight-line method. At the end of the five years, this new leather-stitching machine will be sold for $610,000.
 
In five years a replacement machine will cost $3,500,000. Though today ManeEvent’s management is
deciding between keeping its old saddle stitcher or buying a new one, in 5 years the firm will need to
purchase a new leather stitching machine regardless of what choice it makes today. ManeEvent’s corporate tax rate is 35 percent and the appropriate discount rate is 8 percent. Assume that the
company earns sufficient revenues to generate tax shields from depreciation.
 
Should ManeEvent replace the old saddle-stitcher now or at the end of five years? What will the loss or
cost savings be from doing so?

 
Question 3 _______________________________________________________________________________________________________
Yam Production Industries (YPI) is considering a four-year project to improve its production efficiency.

 
WPI plans to acquire a pair of new laser-cutting machines for $2,944,000 each. Because these new laser
cutters are so efficient, they will collectively produce $1,965,000 in annual pretax cost savings.
According to MACRS, the laser-cutting machines are classified as five-year assets; they will be
depreciated to zero. YPI plans to sell the machines for $355,000 each at the end of the project. The
support these new machines being introduced to the production line, WPI also requires an initial
investment of $280,000 in steel inventory, and it will invest $45,000 more in year 1, as well as an
additional $12,000 per year annually in the next two years. Assume net working capital is fully recovered in the final year of the project.

 
a) If YPI’s tax rate is 35 percent and its discount rate is 12 percent, should the firm buy and install the laser-cutting machines? Build a complete model using the OCF/FCF template for our course.
b) Share price: Before the announcement of this project, YPI’s share price was $33.19. Assuming the
firm has 25,000 shares outstanding, what will the new share price be as a result of this project be
announced?

 
Question 4 ______________________________________________________________________________________________________
After graduating from Concordia, Michael and Michaela combined their marketing prowess to form
Power Health, a firm that produces medical devices. Already featured in several newspapers, their newly
created product, the ToeCuff, is a revolutionary pinkie-toe blood pressure monitor. Though it creates a lot of pressure on that sensitive toe, the ToeCuff produces radically precise blood pressure readings. Power Health has big plans for their little product! The ToeCuff is projected to sell 39,000 units in year one, and unit volume is expected to increase by 12.5% annually each successive year throughout this six-year project. ToeCuffs will sell for $135 per unit. The firm has $630,000 in fixed costs per year. Variable
production costs will be $82 per unit in year one; the variable unit cost will fall by 3% annually throughout the life of the project as the company gains production efficiencies.
 
Power Health will need to invest $3,768,000 in capital equipment to produce the ToeCuffs, as well as
$1,579,500 in inventory before it begins production. Power Health’s total net working required each year will be 30% of the next year’s sales. This equipment falls into the MACRS 5-year class and is not expected to have a salvage value.
 
a) The effective tax rate is 38%, and the required rate of return is 11.5 percent. What is the NPV of
this project? Build a complete model using the OCF/FCF template for our course.
 
b) Share price: Before the announcement of this project, Power Health’s stock traded at $39.87.
Assuming that Michael and Michaela each own 150,000 shares, and that they own all the shares
outstanding, what will be Power Health’s new share price as a result of this project being
undertaken?

 
Question 5 _______________________________________________________________________________________________________Gangsta Grafix (GG) provides mega-size building images used to market sports events, concerts, etc. in
the downtown areas of cities in major markets. The firm’s founder, Hoffa D. Street, is well-known for his bigger than life persona and collection of Lamborghinis. GG is considering building custom printing presses to accommodate the firm’s exploding growth. GG already owns a facility in Phoenix, and plans to build and operate the new printing equipment in this building.
This will be a five-year project. The company’s Phoenix facility was acquired three years ago for
$10.35 million; if the building were sold today, the net proceeds would be $14.4 million after taxes.
 
When this project ends in Year 5, the facility will be sold for $12.7 million after taxes.
Revenue in Year 1 is projected at $18.5 million, and revenue is projected to climb 20% per year
throughout the life of this 5-year project. Operating costs are projected at 30% of sales for all years during
this project.
 
a) Capital Expenditures: The new equipment will cost $36 million and falls into the MACRS 5 year
asset class. The equipment will be sold for $1.675 million at the end of the life of the project.
 
b) Working Capital: The company will initially invest $3.7 million in working capital to support this
new project with parts and printer supplies; In Years 1 – 4, the firm’s total required working capital
will be 20% of the following year’s sales revenue. Assume that all working capital investments are
recovered in the final year of the project.

 
c) Additional Information: The firm spent $1.3 million for consultants to push the building proposal
through the city approval process; Phoenix’ board of supervisors approved this project last week.
GG also spent $348,000 on marketing related to winning the city’s approval, as well as an
additional $910,000 on street improvements so the streets can accept delivery of the heavy
printing equipment.

 
d) Discount rate and corporate tax rate: Gangsta Grafix’ cost of capital is 14.5%. The firm’s corporate
tax rate is 40%.

 
Required:

 
(1) Determine the firm’s free cash flows throughout the life of project. (This problem must be completed
using the “OCF & FCF Template” for our course.)

 
(2) Calculate the project’s NPV and IRR, and specify whether management should make this investment.
Support your recommending by using finance principles and the NPV decision rule and the IRR decision
rule.

Product Code :Fin279

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