Morris Tapestry Analytics (MTA)has prepared the following Income and cash flow s

Question

Morris Tapestry Analytics (MTA)has prepared the following Income and cash flow statements for planning purposes concerning a new product. Management has approved these statements so if there are errors or oversights, that is their problem, not yours.   a Determine the sensitivity of the present worth to changes in the Quantity Sold from 40,000 units to 60,000 units in intervals of 5,000 units. What does this suggest? b Determine the unit Price that would have to be charged to attain the MARR (PW = 0), when the cost of goods sold is $21.00 and the quantity sold is 45,000. Explain how you determined this. c A committee suggested four possible outcomes (Original estimate plus 3 alternatives) shown below. Determine the expected present worth of these four scenarios if all are considered equally likely to occur. Original A B C C14 Investment $2,500,000 $3,000,000 $3,000,000 $2,500,000 C16 Price each $49.00 $49.00 $49.00 $55.00 C17 Quantity Sold 45,000 50,000 45,000 40,000 C18 COGS per unit sold $21.00 $19.00 $21.00 $21.00 C19 SG&A $1,000,000 $1,000,000 $900,000 $1,000,000 Original Values Investment $2,500,000 Year 0 only $2,500,000 Salvage $350,000 Year 5 only $350,000 Price each $49.00 All years $49.00 Quantity Sold 50,000 All years 50,000 COGS per unit sold $19.50 All years $19.50 SG&A $1,000,000 All years $1,000,000 Income tax rate 30% All years 30% Capital Gains Tax rate 15% All years 15% Working capital no change All years no change MARR 15% 15% Depreciation MACRS 5 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Depreciation $500,000 $800,000 $480,000 $288,000 $288,000 $144,000 Book value $2,000,000 $1,200,000 $720,000 $432,000 $144,000 $0 Income Statement 0 1 2 3 4 5 Sales revenue $2,450,000 $2,695,000 $2,964,500 $3,260,950 $3,587,045 Cost of goods sold ($975,000) ($926,250) ($879,938) ($835,941) ($794,144) Gross Margin $1,475,000 $1,768,750 $2,084,563 $2,425,009 $2,792,901 General, Sales and Admin. ($1,000,000) ($1,030,000) ($1,060,900) ($1,092,727) ($1,125,509) Depreciation ($500,000) ($800,000) ($480,000) ($288,000) ($288,000) EBIT ($25,000) ($61,250) $543,663 $1,044,282 $1,379,393 Income tax $7,500 $18,375 ($163,099) ($313,285) ($413,818) Net income ($17,500) ($42,875) $380,564 $730,998 $965,575 Cash Flow Statement Operations Activities Net Income ($17,500) ($42,875) $380,564 $730,998 $965,575 Add depreciation $500,000 $800,000 $480,000 $288,000 $288,000 Total $482,500 $757,125 $860,564 $1,018,998 $1,253,575 Capital Activities Investment -2,500,000             Salvage $350,000 Salvage $350,000 Book value $144,000 Tax on gain ($30,900) Gain $206,000 Total -2,500,000 0 0 0 0 319,100 Tax ($30,900) Cash flow ($2,500,000) $482,500 $757,125 $860,564 $1,018,998 $1,572,675 Present Worth = $422,408 Morris Tapestry Analytics (MTA)has prepared the following Income and cash flow statements for planning purposes concerning a new product. Management has approved these statements so if there are errors or oversights, that is their problem, not yours.   a Determine the sensitivity of the present worth to changes in the Quantity Sold from 40,000 units to 60,000 units in intervals of 5,000 units. What does this suggest? b Determine the unit Price that would have to be charged to attain the MARR (PW = 0), when the cost of goods sold is $21.00 and the quantity sold is 45,000. Explain how you determined this. c A committee suggested four possible outcomes (Original estimate plus 3 alternatives) shown below. Determine the expected present worth of these four scenarios if all are considered equally likely to occur. Original A B C C14 Investment $2,500,000 $3,000,000 $3,000,000 $2,500,000 C16 Price each $49.00 $49.00 $49.00 $55.00 C17 Quantity Sold 45,000 50,000 45,000 40,000 C18 COGS per unit sold $21.00 $19.00 $21.00 $21.00 C19 SG&A $1,000,000 $1,000,000 $900,000 $1,000,000 Original Values Investment $2,500,000 Year 0 only $2,500,000 Salvage $350,000 Year 5 only $350,000 Price each $49.00 All years $49.00 Quantity Sold 50,000 All years 50,000 COGS per unit sold $19.50 All years $19.50 SG&A $1,000,000 All years $1,000,000 Income tax rate 30% All years 30% Capital Gains Tax rate 15% All years 15% Working capital no change All years no change MARR 15% 15% Depreciation MACRS 5 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Depreciation $500,000 $800,000 $480,000 $288,000 $288,000 $144,000 Book value $2,000,000 $1,200,000 $720,000 $432,000 $144,000 $0 Income Statement 0 1 2 3 4 5 Sales revenue $2,450,000 $2,695,000 $2,964,500 $3,260,950 $3,587,045 Cost of goods sold ($975,000) ($926,250) ($879,938) ($835,941) ($794,144) Gross Margin $1,475,000 $1,768,750 $2,084,563 $2,425,009 $2,792,901 General, Sales and Admin. ($1,000,000) ($1,030,000) ($1,060,900) ($1,092,727) ($1,125,509) Depreciation ($500,000) ($800,000) ($480,000) ($288,000) ($288,000) EBIT ($25,000) ($61,250) $543,663 $1,044,282 $1,379,393 Income tax $7,500 $18,375 ($163,099) ($313,285) ($413,818) Net income ($17,500) ($42,875) $380,564 $730,998 $965,575 Cash Flow Statement Operations Activities Net Income ($17,500) ($42,875) $380,564 $730,998 $965,575 Add depreciation $500,000 $800,000 $480,000 $288,000 $288,000 Total $482,500 $757,125 $860,564 $1,018,998 $1,253,575 Capital Activities Investment -2,500,000             Salvage $350,000 Salvage $350,000 Book value $144,000 Tax on gain ($30,900) Gain $206,000 Total -2,500,000 0 0 0 0 319,100 Tax ($30,900) Cash flow ($2,500,000) $482,500 $757,125 $860,564 $1,018,998 $1,572,675 Present Worth = $422,408

Explanation / Answer

a.
Change the units sold for different cases and calculate the present worth every time.

-725355

This suggests that as sales increses, Present worth increases.

b.
Unit price for which present worth = 0 is $61.031. This is found by trial and error by changing the unit price and calculating the Present worth. As we increased unit price, Present worth increased and came closer to 0 . At 61.031 PW=18.45 and increasing unit price futher increases Present worth and pushesh it away form zero.

c. For different cases th parameter were change in the excel sheet .

Since all the outcomes are equally likely, Present worth is average of above values = -$1,057,143

Units sold 40000 45000 50000 55000 60000 Present worth -1380956 -1053156

-725355

-397554 -69753

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