Zoom Car Corporation (ZCC) plans to purchase approximately 100 vehicles on Decem
ID: 2481481 • Letter: Z
Question
Zoom Car Corporation (ZCC) plans to purchase approximately 100 vehicles on December 31, 2015, for $2.5 million, plus 11 percent total sales tax. ZCC expects to use the vehicles for 5 years and then sell them for approximately $525,000. ZCC anticipates the following average vehicle use over each year ended December 31 2016 15,000 2017 20,000 2018 11,250 2020 5,000 Miles per year 11,250 To finance the purchase, ZCC signed a 5-year promissory note on December 31, 2015, for $2.25 million, with interest paid annually at the market interest rate of 5 percent. The note carries loan covenants that require ZCC to maintain a minimum times interest earned ratio of 3.0 and a minimum fixed asset turnover ratio of 1.0. ZCC forecasts that the company wil generate the following sales and preliminary earnings (prior to recording depreciation on the vehicles and interest on the note). (For purposes of this question, ignore income tax.) (in 000s) Sales Revenue 2017 2018 2019 2020 2,500 3,000 3,300 3,400 3,500 1,450 1,650 1,750 1,850 2016 Income before Depreciation and Interest Expense 1,250
Explanation / Answer
Ans 1 Interest expense 2.25 million*5% 112500 Working 2016 2017 2018 2019 2020 Sales Revenue 2500000 3000000 3300000 3400000 3500000 Income Before Depreciation and Interest 1250000 1450000 1650000 1750000 1850000 Less: Interest expense 112500 112500 112500 112500 112500 Income Before Depreciation after Interest 1137500 1337500 1537500 1637500 1737500 Deprecitaion through Straight Line Method 450000 450000 450000 450000 450000 Depreciation through Double Declining Method 1110000 666000 399600 239760 143856 Depreciation as per unit of production method 540000 720000 405000 405000 180000 Depreciation method=Straight Line Method Cost=2500000+2500000*11% 2775000 2775000-525000/5 450000 Book value at the end of the year 2016 450000 2325000 2017 450000 1875000 2018 450000 1425000 2019 450000 975000 2020 450000 525000 Total 2250000 Doublr declining method Depreciation method=Double Declining method 200%*Straight Line Depreciation Rate* book value at the beginning of the year Straight Line Depreciation rate= 100%/5= 20% Year Net Book Value at beginning Depreciation 200%*20%*Beginning NBV Net Book Value at the end Calculation of Depriciation 2016 2775000 1110000 1665000 2775000*2*.2 2017 1665000 666000 999000 2018 999000 399600 599400 2019 599400 239760 359640 2020 359640 143856 215784 Total 2559216 Unit of Activity Method Depreciation=Actual No.of units or hours /Total no. of units or expected hours to be produced*(Cost-Salvage value) For accumulated depreciation we can add all the actual hours used in 5 years and than calculate Total miles=15000+20000+11250+11250+5000 62500 2775000-525000/62500 36 per mile Depreciation Book value at the end of the year 2016 15000 36 540000 2235000 2017 20000 36 720000 1515000 2018 11250 36 405000 1110000 2019 11250 36 405000 705000 2020 5000 36 180000 525000 2250000 Ans a) straight Line Method Sales Revenue 2500000 3000000 3300000 3400000 3500000 Income Before Depreciation and Interest 1250000 1450000 1650000 1750000 1850000 Less: Interest expense 112500 112500 112500 112500 112500 Less: depreciation 450000 450000 450000 450000 450000 Net Income 687500 887500 1087500 1187500 1287500 Times Interest earned Ratio Income Before Depreciation and Interest/Interest expense 11.11 12.89 14.67 15.56 16.44 Fixed asset turnover ratio Sales/Fixed Assets 1.08 1.60 2.32 3.49 6.67 Fixed Assets (Book Value) 2325000 1875000 1425000 975000 525000 Double declining Method Sales Revenue 2500000 3000000 3300000 3400000 3500000 Income Before Depreciation and Interest 1250000 1450000 1650000 1750000 1850000 Less: Interest expense 112500 112500 112500 112500 112500 Less: depreciation 1110000 666000 399600 239760 143856 Net Income 27500 671500 1137900 1397740 1593644 Times Interest earned Ratio Income Before Depreciation and Interest/Interest expense 11.11 12.89 14.67 15.56 16.44 Fixed asset turnover ratio Sales/Fixed Assets 1.50 3.00 5.51 9.45 16.22 Fixed Assets (Book Value) 1665000 999000 599400 359640 215784 Unit of Production method Sales Revenue 2500000 3000000 3300000 3400000 3500000 Income Before Depreciation and Interest 1250000 1450000 1650000 1750000 1850000 Less: Interest expense 112500 112500 112500 112500 112500 Less: depreciation 540000 720000 405000 405000 180000 Net Income 597500 617500 1132500 1232500 1557500 Times Interest earned Ratio Income Before Depreciation and Interest/Interest expense 11.11 12.89 14.67 15.56 16.44 Fixed asset turnover ratio Sales/Fixed Assets 1.12 1.98 2.97 4.82 6.67 Fixed Assets (Book Value) 2235000 1515000 1110000 705000 525000 Ans 4 No loan covenants would not be violated under any method
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