Harriman Manufacturing Company, Math Problem Example

Pages: 1

Words: 762

Math problem
  1. a) –Calculate the expected net cash outlay (the amount of the capital investment) at the beginning of the first year.

Initial Cash Outlay = Purchase Price + Direct Expenses + Capital Expenditures

= $50,000 + $10,000 + 0

= $60,000

 

  1. b) – Estimate the net operating cash flows in years 1, 2 and 3, and assume they occur at the end of each year.

The net operating cash flow can be found with the capital budgeting process. Below mentioned chart analyze the whole thing in detail

 

Worksheet for Computation of Cash Flow
           
    Year 1 Year 2 Year 3 Year 4
Investment Y      60,000        
Depreciation                    19,800           22,110          15,376.50             2,523.56
Adjusted Basis of Machine                    40,200           18,090            2,713.50                 189.95
           
Inventory                      3,000             3,000                  3,000                   3,000
Non Interest Bearing                      1,000             1,000                  1,000                   1,000
           
Cost Saving                    20,000           20,000                20,000                 20,000
Revenue                    20,000           20,000                20,000                 20,000
Tax Rate                      8,000             8,000                  8,000                   8,000
           
Net Income                    12,000           12,000                12,000                 12,000
Add: Depreciation                    19,800           22,110                15,377                   2,524
           
Cash Inflow                    31,800           34,110                27,377                 14,524
           

 

The depreciation has been computed with the help of MACRS and in the end it added back in the net income to arrive on cash inflow.

 

  1. c) – What is the dollar value of the non-operating net cash terminal value (i.e., Salvage Value) during the fourth year?

 

The salvage as well as gain from selling is mentioned below in the table

Terminal Value Computation
   
Total Value  Salvage Value
60,000                    2,523
   
Selling Price                  20,000
Gain from Selling                  17,477

 

 

 

  1. d) – If Harriman’s weighted average cost of capital (required rate of return) is 10%, what are the investment’s Net Present Value, Internal Rate of Return, and Simple Payback Period? Should the investment be made?

 

Net Present Value Computation

Net Present Value (hereafter NPV) is the most widely used tool to assess the economic compatibility of a particular project. Basically the NPV which is also called Net Present worth (NPW) is a time series of cash flows which are both ingoing and outgoing is called NPV. Basically it is the sum of all the present values of the individual cash flows (Edwin & Ruud, 2000). NPV is very useful in the world of finance and has been counted as the central tool to appraise the long term projects with the help of discounted cash flow techniques and time value of money factor.

 

Net Present Value @ 10% WACC
Initial Outlay                                    (60,000)  
Year Undiscounted Cash Flow Discounted @ 10%
1                                       31,800                           28,909
2                                       34,110                           28,190
3                                       27,377                           20,568
4                                       14,524                             9,920
     
     
PV                             87,587
Less: Initial Outlay                             60,000
NPV                             27,587

 

Decision: As the NPV is in positive, then the company should take this project.

 

 

Internal Rate of Return

 

Internal Rate of Return (IRR) is another widely used tool to analyze a company or project before taking it. IRR is the rate on which the NPV of the project becomes zero. If the computed IRR comes out greater than the discount or hurdle rate then the project should be taken.

IRR
  Undiscounted Discounted
Year -60000 -60000
1 31,800 28,909
2 34,110 28,190
3 27,377 20,568
4 14,524 9,920
     
IRR 32% 20%
     

 

Decision: As the WACC of the company is 10% and computed IRR is 20%, the company should select the same.

 

Simple Payback Period

This analyze in how much time the company overcome the initial cost of the project.

Payback Analysis
  Undiscounted Discounted
Year -60000 -60000
1 31,800 28,909
2 34,110 28,190
3 27,377 20,568
4 14,524 9,920
     
  1.07 Years 3.29 Years
     

 

The payback period is also good, hence all of the things are in favor of the company; hence the company should invest in this project.

 

 

References

Edwin, J & Ruud, T (2000). Project Management & Analysis. New York: McGraw Hill Publications

Fisk, P. (2006). Project Management: An Introductory Review. London: John Wily & Sons Professional Publications.

Time is precious

Time is precious

don’t waste it!

Get instant essay
writing help!
Get instant essay writing help!
Plagiarism-free guarantee

Plagiarism-free
guarantee

Privacy guarantee

Privacy
guarantee

Secure checkout

Secure
checkout

Money back guarantee

Money back
guarantee

Related Math problem Samples & Examples

Free Cash Flow Assess a Company’s Liquidity; Ability to Meet Immediate Obligations, Math Problem Example

Cash from operating activities is intended to indicate the cash-generating capability of the company but it fails to take into account that a company must [...]

Pages: 1

Words: 186

Math problem

Dividends and Stock Split, Math Problem Example

Practice Question 5 – Cash Dividends A company has the following shares issued 6% Preferred Stock $100 par value, cumulative, 20,000 shares authorized 2,000 shares [...]

Pages: 1

Words: 306

Math problem

Cost of Capital, Math problem Example

AirJet Best Parts Inc. is now considering that the appropriate discount rate for the new machine should be the cost of capital and would like [...]

Pages: 1

Words: 491

Math problem

Accounting Homework Session, Math Problem Example

Class Discussion Questions What two types of transactions cause most current liabilities? The two types of transactions are unearned revenue and short-term obligations. To match [...]

Pages: 1

Words: 66

Math problem

Price Estimation, Math Problem Example

Question 3 Part A Direct Labor Fluffs = 80,000 * 0.10 = 8,000 hrs. Crinkles = 60,000 * 0.20 = 12,000 hrs. Snaps = 20,000 [...]

Pages: 1

Words: 87

Math problem

Finance for Leisure and Tourism, Math problem Example

BALANCE SHEET FOR THE YEAR ENDED DECEMBER 31, 2010                                                                                                               Debits             Credits Legal Fees                                                                                              8 Bank                                                                                                    122 Creditors                                                                                                                     [...]

Pages: 1

Words: 784

Math problem

Free Cash Flow Assess a Company’s Liquidity; Ability to Meet Immediate Obligations, Math Problem Example

Cash from operating activities is intended to indicate the cash-generating capability of the company but it fails to take into account that a company must [...]

Pages: 1

Words: 186

Math problem

Dividends and Stock Split, Math Problem Example

Practice Question 5 – Cash Dividends A company has the following shares issued 6% Preferred Stock $100 par value, cumulative, 20,000 shares authorized 2,000 shares [...]

Pages: 1

Words: 306

Math problem

Cost of Capital, Math problem Example

AirJet Best Parts Inc. is now considering that the appropriate discount rate for the new machine should be the cost of capital and would like [...]

Pages: 1

Words: 491

Math problem

Accounting Homework Session, Math Problem Example

Class Discussion Questions What two types of transactions cause most current liabilities? The two types of transactions are unearned revenue and short-term obligations. To match [...]

Pages: 1

Words: 66

Math problem

Price Estimation, Math Problem Example

Question 3 Part A Direct Labor Fluffs = 80,000 * 0.10 = 8,000 hrs. Crinkles = 60,000 * 0.20 = 12,000 hrs. Snaps = 20,000 [...]

Pages: 1

Words: 87

Math problem

Finance for Leisure and Tourism, Math problem Example

BALANCE SHEET FOR THE YEAR ENDED DECEMBER 31, 2010                                                                                                               Debits             Credits Legal Fees                                                                                              8 Bank                                                                                                    122 Creditors                                                                                                                     [...]

Pages: 1

Words: 784

Math problem