Tax Credits -Federal or state incentives for activity in the public interest. Ap
ID: 2406661 • Letter: T
Question
Tax Credits -Federal or state incentives for activity in the public interest. Applicable Depreciation Rate Policy question, set by management Federal and State Income Tax Rate -Company figure, provided Required Rate of Return -This tells us the cash flow discount rate to be used, and can be complex and political. Theoretically, the figure to use is the weighted average cost of capital, including the three sources of capital--debt, preferred stock, and retained earnings. Often is simply the firm's current borrowing rate. May be the rate of earnings from current operations. Basic Sales and Cost Forecasts The primary data inputs: the number of units to be sold, the direct production cost per unit, and the total marketing expenditures. OUTPUT Net Present Value (NPV) The sum of the discounted cash flows over the life of the product FINANCIAL Exercisel Financial analysis of new products at Bay City Electronics had always been rather informal. Bill Roberts, who founded the firm in 1970, knew residential electronics because he had worked for almost seven years for another firm specializing in home security systems. But, he had never been trained in financial analysis. In fact, all he knew was what the bank had asked for every time he went to discuss his line of credit Bay City had about 45 full-time employees (plus a seasonal factory work force) and did in the neighborhood of $18 million in sales. His products all related to home security and were sold by his sales manager, who worked wholesalers, hardware and department store chains, and other large retailer. He did some consumer advertising, but not much. with a group of manufacturers' reps, who in turn called on Bill was inventive, however, and had built the business primarily by coming up with new techniques. His latest device was a remote-controlled electronic closure for any door in the home. The closure was effected by a special ringing of the telephone: for example, if a user wanted to leave a back door open until 9:00 p.m. it was simple to call the house at 9:00 and wait for 10 rings, after which the electronic device would switch the door to a locked position. A similar call would reopen the door The bank liked the idea but wanted Bill to do a better job of financial analysis. Based on his understanding of this market, Bill filled out the FINANCIAL worksheet as appears at the end of the exercise. To date, Bay City had spent S85,000 in expense money for supplies and labor developing the closure and had invested $15,000 in a machine (asset). If the company decided to go ahead, it would have to invest $50,000 more in a new facility, continue R&D; to validate and This is a condensed version of the Bay City Electronics case in the New Products Management text by Crawford and Di Benedetto.Explanation / Answer
(a)
(b) 1. If the direct manufacturing cost remains $16 per unit throughout the 5 years instead of reducing over time the total revised direct manufacturing cost would be calculated as follows
Revised NPV with revised Direct Manufacturing Cost is as follows
2.b) If direct Marketing cost is double the forecasted from year 2, the revised direct marketing cost is as follows
Revised NPV
Year 0 1 2 3 4 5 Unit Sales (A) 0 4,000 10,000 18,000 24,000 5,000 Revenue per unit (B) 0 52 52 52 52 52 Dollar Sales (C=A*B) 0 208,000 520,000 936,000 1,248,000 260,000 Production Costs Direct (D) 0 64,000 120,000 198,000 216,000 70,000 Indirect ('E) 0 12,800 24,000 39,600 43,200 14,000 Total (F=D+E) 0 76800 144000 237600 259200 84000 Gross Profit (G= C-F) 0 131200 376000 698400 988800 176000 Direct Marketing Costs (H) 0 100,000 80,000 50,000 60,000 10,000 Profit Contribution (I=G-H) 0 31200 296000 648400 928800 166000 Overheads (excluding R&D) Division (J) 0 - - - - - Corporate (K) 0 20,800 52,000 93,600 124,800 26,000 Total (L=J+K) 0 20800 52000 93600 124800 26000 Other Expenses Depreciation (M) 16250 16,250 16,250 31,250 15,000 15,000 Cannabilization (N) 0 20,800 52,000 93,600 124,800 26,000 R&D to be incurred (O) 0 15,000 10,000 15,000 10,000 - Extraordinary expense (P) 0 - 5,000 - - - Project Abandonment (Q) 3000 - - - - - Total (R=M+N+O+P+Q) 19250 52050 83250 139850 149800 41000 Overhead and expenses (S=L+R) 19250 72850 135250 233450 274600 67000 Income before taxes T=I-S) -19250 -41650 160750 414950 654200 99000 Tax effect Taxes on income (U=T* 34%) -6545 -14161 54655 141083 222428 33660 Tax credits (V=U*1%) -65 -142 547 1411 2224 337 Total Effect W=(U+V) -6480 -14019 54108 139672 220204 33323 Cashflow Income after taxes (X=T-W) -12770 -27631 106642 275278 433996 65677 Depreciation (M) 16250 16250 16250 31250 15000 15000 Production facitlites (Y) 50000 - - 45,000 - - Working Capital: Cash (Z) 0 20,800 31,200 41,600 31,200 - 124,800 (C*10%) (C*10%)-0 (C*10%)-0-20800 (C*10%)-0-20800-31200 (C*10%)-0-20800-31200 (0+20800+31200+41600+31200)*100% Working Capital: Inventories (AA) 0 20,800 31,200 41,600 31,200 - 99,840 (C*10%) (C*10%)-0 (C*10%)-0-20800 (C*10%)-0-20800-31200 (C*10%)-0-20800-31200 (0+20800+31200+41600+31200)*80% Working Capital: Accounts Receivable (AB) 0 31,200 46,800 62,400 46,800 - 187,200 (C*15%) (C*15%)-0 (C*15%)-0-31200 (C*15%)-0-31200-46800 (C*15%)-0-31200-46800-62400 (31200+46800+62400+46800)*100% Net Cashflows (AC=X+M-Y-Z-AA-AB) -46520 -84181 13692 115928 339796 492517 DCF @ 24% (AD) 1 0.81 0.65 0.52 0.42 0.34 (1/1.24) (1/1.24^2) (1/1.24^3) (1/1.24^4) (1/1.24^5) Discounted Cashflows (AE = AC*AD) - 46,520 - 67,888 8,904 60,803 143,725 168,001 NPV (Sum of AE) 267,025Related Questions
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