Below are Income and cash flow statements for a new product model. Management ha
ID: 2645683 • Letter: B
Question
Below are Income and cash flow statements for a new product model. Management has approved these statements but wants to look at some alternatives. The cells with a shaded background in column D contain the original values and are shown only to assist you in reverting back to the original values if needed. All question parts should start from the original data. a Determine the unit price to attain a PW = $250,000. Describe how you determined this. b Starting with the original values, determine the COGS each for which the present worth is zero. Describe how you determined this. c Two estimates are shown below of the Sales Quantity in year 1, and the Sales Quantity Annual Increase. The two estimates are equally probable. Using these two estimates, determine the expected present worth. Start with the original values. Estimates 1 2 Sales quantity in Year 1 35000 45000 Sales Quantity Annual Increase 20% 25% Model Copy of Original Values Sales quantity in Year 1 35,000 35,000 Sales Quantity Annual Increase 20% 20% Unit Price (all years) $40.00 $40.00 COGS each $12.00 $12.00 S.G.& A. $750,000 $750,000 Income tax rate 20% 20% MARR 15% 15% 0 Investment $2,000,000 $2,000,000 Years 0 1 2 3 4 5 6 Sales Quantity Forecast 35,000 42,000 50,400 60,480 72,576 87,091 Depreciation 5-year MACRS 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Book Value $1,600,000 $960,000 $576,000 $345,600 $115,200 $0 Income Statement 0 1 2 3 4 5 6 Sales revenue $1,400,000 $1,680,000 $2,016,000 $2,419,200 $2,903,040 $3,483,648 Cost of goods sold ($420,000) ($504,000) ($604,800) ($725,760) ($870,912) ($1,045,094) Gross Margin $980,000 $1,176,000 $1,411,200 $1,693,440 $2,032,128 $2,438,554 General, Sales and Admin. ($750,000) ($750,000) ($750,000) ($750,000) ($750,000) ($750,000) Depreciation ($400,000) ($640,000) ($384,000) ($230,400) ($230,400) ($115,200) EBIT ($170,000) ($214,000) $277,200 $713,040 $1,051,728 $1,573,354 Income tax $34,000 $42,800 ($55,440) ($142,608) ($210,346) ($314,671) Net income ($136,000) ($171,200) $221,760 $570,432 $841,382 $1,258,683 Cash Flow Statement Net Income ($136,000) ($171,200) $221,760 $570,432 $841,382 $1,258,683 Add depreciation $400,000 $640,000 $384,000 $230,400 $230,400 $115,200 Investment (2,000,000) Change in Working Capital ($140,000) ($28,000) ($33,600) ($40,320) ($48,384) ($58,061) Cash flow ($2,000,000) $124,000 $440,800 $572,160 $760,512 $1,023,398 $1,315,822 Present Worth = IRR $329,840 19.4% Below are Income and cash flow statements for a new product model. Management has approved these statements but wants to look at some alternatives. The cells with a shaded background in column D contain the original values and are shown only to assist you in reverting back to the original values if needed. All question parts should start from the original data. a Determine the unit price to attain a PW = $250,000. Describe how you determined this. b Starting with the original values, determine the COGS each for which the present worth is zero. Describe how you determined this. c Two estimates are shown below of the Sales Quantity in year 1, and the Sales Quantity Annual Increase. The two estimates are equally probable. Using these two estimates, determine the expected present worth. Start with the original values. Estimates 1 2 Sales quantity in Year 1 35000 45000 Sales Quantity Annual Increase 20% 25% Model Copy of Original Values Sales quantity in Year 1 35,000 35,000 Sales Quantity Annual Increase 20% 20% Unit Price (all years) $40.00 $40.00 COGS each $12.00 $12.00 S.G.& A. $750,000 $750,000 Income tax rate 20% 20% MARR 15% 15% 0 Investment $2,000,000 $2,000,000 Years 0 1 2 3 4 5 6 Sales Quantity Forecast 35,000 42,000 50,400 60,480 72,576 87,091 Depreciation 5-year MACRS 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Book Value $1,600,000 $960,000 $576,000 $345,600 $115,200 $0 Income Statement 0 1 2 3 4 5 6 Sales revenue $1,400,000 $1,680,000 $2,016,000 $2,419,200 $2,903,040 $3,483,648 Cost of goods sold ($420,000) ($504,000) ($604,800) ($725,760) ($870,912) ($1,045,094) Gross Margin $980,000 $1,176,000 $1,411,200 $1,693,440 $2,032,128 $2,438,554 General, Sales and Admin. ($750,000) ($750,000) ($750,000) ($750,000) ($750,000) ($750,000) Depreciation ($400,000) ($640,000) ($384,000) ($230,400) ($230,400) ($115,200) EBIT ($170,000) ($214,000) $277,200 $713,040 $1,051,728 $1,573,354 Income tax $34,000 $42,800 ($55,440) ($142,608) ($210,346) ($314,671) Net income ($136,000) ($171,200) $221,760 $570,432 $841,382 $1,258,683 Cash Flow Statement Net Income ($136,000) ($171,200) $221,760 $570,432 $841,382 $1,258,683 Add depreciation $400,000 $640,000 $384,000 $230,400 $230,400 $115,200 Investment (2,000,000) Change in Working Capital ($140,000) ($28,000) ($33,600) ($40,320) ($48,384) ($58,061) Cash flow ($2,000,000) $124,000 $440,800 $572,160 $760,512 $1,023,398 $1,315,822 Present Worth = IRR $329,840 19.4%Explanation / Answer
Let x be the price per unit to attain a PW of $250,000. Assuming all other things remain the same the present worth calculations are as follows:
Present Value of Inflow - Present Value of Outflow = 250,000
137071.83x-3483672.36 - 2000000 = 250000
137071.83x - 5483672.36 = 250000
137071.83x = 5733672.36
x = 41.829
Selling Price per unit to maintain a PW of 250000 at 19.4% is $41.829
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