HW 6.1 Q 18 through 21
#18
#19
#20
#21
ACC 1820 Project 6 Name___________________________________
Use Questions 18 through 21 for Most Company from HW 6.1 on connect. I am changing the name of the company to iMost because I find the name “Most” Company leads the reader to read most companies and is confusing.
OVERVIEW: In the questions on connect, iMost Company compares two projects; Project Y and Project Z. To continue the scenario, after their initial evaluation of the projects (connect), iMost Company wants to make some changes to its original assumptions and re-evaluate. The company wants to make both the projects (Y and Z) span the same six-year period. To understand the requirements necessary to accomplish this, the company hires an outside consulting service to perform a more in-depth/ study of the business plans and identify changes to accommodate the six-year length. Project annual net income is estimated for each project (Y and Z) for each of the 6 years. This projected annual income is used to calculate annual cash flows from operations. iMost also plans to bo
ow money, thus reducing their initial investment. All factors su
ounding the projects (Y and Z) are evaluated using various capital budgeting tools, including Pay-Back Period, Net Present Value, Profitability Index and Break-Even Time. The best project (Y or Z) is selected to run as a division of the company iMost. Targeted evaluation measures are calculated for the division actual operating. Four years later, the company’s operating results are compared to the targets. After this post audit, various operational decisions are examined for viability for years 5 and 6.
Given Information: Before iMost Company chooses between Projects Y and Z, the company hires an outside consulting service to perform an in-depth study and develop a more detailed business plan. The consultants’ report indicated the following items need to be adjusted to the original projected net income for the projects (Y and Z):
a. To assure the new equipment will last the full 6 years, it is recommended that iMost purchase an improved model for Project Z. Additionally, regardless which project they choose, (Y or Z), it is recommended that iMost Company enter into a maintenance agreement.
. The equipment for both projects will have a salvage value at the end of 6 years.
c. The consulting firm has determined that purchasing advertising in the first three years of the project will result in significantly increase sales (and variable expenses) over the entire 6 years of the projects. The advertising will cause sales, direct material, and direct labor expenses to increase.
d. iMost Company will also need to maintain a certain level of working capital for each project.
e. To off-set the increased cost of the equipment for Project Z as well as the working capital required for both projects, iMost Company plans to bo
ow any amount of the project that exceeds $300,000. iMost will make interest payments annually (Interest Expense) and plans to pay the note at the end of the third year of operations.
1. The changes described above will cause the original (connect) project information to change. Use the tables below and follow the direction underneath to calculate iMost Company’s new projected information. Round all dollar amounts to nearest whole dollars.
Project Y
Project Z
Item
Original (connect)
New Projected
Explanations for changes
Original (connect)
New Projected
Explanations for changes
Equipment Cost
unchanged
Add $40,000
Useful Life
6
6
Salvage Value
0
4,000
given
0
5% of new cost
Depreciation
calculate
calculate
Maintenance
0
2% of Equip. cost
0
2% of Equip. cost
Sales
increase by 14%
increase by 28%
Direct Material
increase by 14%
increase by 28%
Direct Labo
increase by 14%
increase by 28%
OH including Dep
original – original depreciation + “New” depreciation + maintenance costs
original – original depreciation + “New” depreciation + maintenance costs
S&A Expenses
increase by 7%
increase by 14%
Working Capital
0
8% of new sales
0
8% of new sales
Loan amount
0
equipment cost + working capital – 300,000
0
equipment cost + working capital – 300,000
Loan Interest rate
n/a
half discount rate
n/a
half discount rate
Interest Expense
0
loan x interest rate
0
loan x interest rate
a. Include the appropriate information from connect in the “original” columns for both projects (pale blue cells). Note – The original depreciation expense was calculated for Q18 on connect. All other information was provided in the information for Q18-21.
. Equipment cost for Project Y will be unchanged. Project Z’s “New” projected cost will be $40,000 higher than the original. Add 40,000 to the “original” cost of equipment and include in the “New” column for Project Z.
c. The salvage value for Project Y is estimated to be $4,000. The salvage value for Project Z is estimated to be 5% of its “New” project cost. Calculate the salvage value for Project Z’s equipment and include the amount in the “New” column appropriately.
d. Calculate the “New” projected straight-line depreciation amounts for both projects using the respective salvage values and 6-year useful life. Include amounts in the table in the “New” column.
e. Calculate the “New” maintenance expense for each project as 2% of the “New” project equipment costs respectively for Project Y and Z. This amount will also be added to the overhead expense.
f. Calculate the “New” overhead amount as follows: Original overhead – Original depreciation + New depreciation + New Maintenance. Note – The amounts will be different for each project.
g. The increased advertising will cause sales, direct material, and direct labor to increase by 14% for Project Y and 28% for Project Z. Calculate the “New” project sales revenue, direct material expense and direct labor expense for each project and include in the table appropriately.
h. To accommodate the increased sales volume, iMost expects S&A expenses to increase by 7% for Project Y and 14% for Project Z. Calculate the “New” S&A expenses for each project.
i. The required working capital is estimated to be 8% of the “New” sales amount for each project. Calculate the working capital for each project and included it appropriately.
j. Calculate the Loan amount for each project as the total asset cost above $300,000: New equipment cost + Working Capital – 300,000. Include in the table appropriately.
k. iMost Company will be able to bo
ow money at an interest rate of half their discount rate. The discount rate was given in connect Q21. Calculate the interest rate for the loan as half the discount rate. Include the interest expense amount in the table appropriately.
l. Calculate the annual interest expense as the loan amount times the interest rate and include in the table appropriately.
2. Use the information from 1 and prepare the projected income statements and expected annual cash flows for both projects using the tables below. Follow the directions provided below the table.
Revised Projected Annual Net Income
Project Y
Project Z
Annual amounts
Years 1 - 3
Annual amounts
Years 4- 6
Annual amounts
Years 1 - 3
Annual amounts
Years 4 - 6
Sales
Expenses:
Direct materials
Direct labo
Overhead (with Depreciation)
S&A expenses
Interest Expense
0
0
Total Expenses
Pretax income
Income taxes
Projected Annual Net Income
Add: Depreciation Expense
Expected Annual Net Cash Flow from Operations
Note: The only expenses that will be different between the first column (years 1-3) and the second column (years XXXXXXXXXXare S&A expenses, interest expense and income tax expense.
a. Additional advertising expense will be incu
ed in the first 3 years that will cause S&A expenses to be higher in the first columns (years XXXXXXXXXXAdd $45,000 and $55,000 to the “New” S&A expenses (table in 1), respectively for Project Y and Z. This will be the S&A expense for the column “years 1 – 3”. The S&A expense for the column “years 4 – 6” will be equal to the “New” S&A expense amount (without the added amount) from the table in 1.
. Interest will need to be paid (and expensed) each of the first 3 years for the loan. For “Years 1 – 3”, Interest expense will equal the interest expense from the “New” column in 1. iMost Company plans to pay off the loan at the end of year 3 such that there will be zero interest expense in “Years 4 – 6”.
c. For all 4 columns, calculate the Pretax income as sales revenue minus total expenses.
d. Use the income tax rate from connect Q18-21 given information to calculate the income taxes for all 4 columns.
e. For all 4 columns, calculate the “projected annual net income” by subtracting the income tax from pretax income.
f. Include the Depreciation Expense from the “New” column for each project appropriately.
g. Calculate the “Expected Annual Net Cash Flow from Operations” for all 4 columns.
The tables in 1 and 2 are your check points. Make sure to share these with Teri before moving on.
3. Summarize all the anticipated cash flows by year for each project. The “Now” column represents cashflows that will take place at the beginning of year 1 (before the project commences operations). Remember to include cash outflows as negative and all inflows as positive. The Loan proceeds will be received “now” (positive), and the principal payment will occur at the end of year three (negative). Interest is already included in the “expected annual net cash flows”. Hint: Cells that should have inputs are shaded in light blue.
Anticipated Cash Flow for Project Y
Now
Y1
Y2
Y3
Y4
Y5
Y6
Cost of equipment
Working capital
Loan Proceeds
Expected annual net cash flow
Release of working capital