(15 pts) I. Mars Corp. is considering overhauling its equipment to meet increase
ID: 2803846 • Letter: #
Question
(15 pts) I. Mars Corp. is considering overhauling its equipment to meet increased demand for its product. The cost of the equipment overhaul is $6.6 million plus $400,000 in installation costs. The life of the project is 7 years. At the end of the project, the equipment will be sold for $900,000. Additional sales revenues from the overhaul should amount to $2 million per year, and additional operating expenses (excluding depreciation) will amount to 40 percent of additional sales. The project will require an investment in net working capital of $400,000 at the beginning of the project. Mars' tax rate is 40 percent Mars has a cost of money of 11 percent. Determine whether Mars should overhaul the equipment. Show all computations.Explanation / Answer
QUESTION 1:
Given information
Cost of the project =
6600000
Intallment cost =
400000
Life of the project =
7 Years
Salvage value =
900000
Depreciation = (6800000-900000)/7=
871429
Additional sales revenue =
2000000
Additional operating cost = 40% of additional sales = 2000000*40%
800000
Tax rate =
40%
Cost of capital
11%
STep1:
Computation of intial cash outflow
Particulars
Amount
Cost of project
6600000
Installment cost
400000
Total
7000000
Step2
Computation of present value of operating cash inflows
Particulars
Amount
Additional sales revenue =
2000000
Additional operating cost = 40% of additional sales = 2000000*40%
800000
EBDT
1200000
Less: Depreciation
871430
EBT
328570
Less: tax @40%
131428
EAT
197142
Add: Depreciation
871430
CFAT
1068572
PVAF @ 11%, 7 YEARS
4.712
Present value
5035111.264
Step3
Computation of present value of salavge cash inflows
Particulars
Amount
Capital gain
0
Less: tax
0
After tax
900000
PVF @ 11%, 7 YEARS
0.482
Present value
433800
Step 4:
NPV =
-1531088.736
Since npv is negative is not feasable to invest
QUESTION 2
Particulars
Option1 Current assets 60%
Option1 Current assets 25%
sales
10000000
10000000
Expected current assets
6000000
2500000
Fixed assets
10000000
10000000
total assets
16000000
12500000
Debt
8000000
6250000
Equity
8000000
6250000
EBIT
3000000
3000000
Interest @10%
800000
625000
EBT
2200000
2375000
Less: Tax
880000
950000
EAT
1320000
1425000
Return of equity
16.5
22.8
Current asssets 25% has more return
ssame as option2 is more risky
QUESTION 3
a)
Cash dividend paid=
5256000000
b)
Number shares
925790000
c)
Net Income
11872000000
d)
Current market price
149
e)
Dividend per share = a/b
5.67731343
f)
Dividend yield e*100/d
3.81%
g)
Earnings per share = c/b
12.82364251
h)
Dividend pay out ratio = a/c
44.27%
QUESTION 1:
Given information
Cost of the project =
6600000
Intallment cost =
400000
Life of the project =
7 Years
Salvage value =
900000
Depreciation = (6800000-900000)/7=
871429
Additional sales revenue =
2000000
Additional operating cost = 40% of additional sales = 2000000*40%
800000
Tax rate =
40%
Cost of capital
11%
STep1:
Computation of intial cash outflow
Particulars
Amount
Cost of project
6600000
Installment cost
400000
Total
7000000
Step2
Computation of present value of operating cash inflows
Particulars
Amount
Additional sales revenue =
2000000
Additional operating cost = 40% of additional sales = 2000000*40%
800000
EBDT
1200000
Less: Depreciation
871430
EBT
328570
Less: tax @40%
131428
EAT
197142
Add: Depreciation
871430
CFAT
1068572
PVAF @ 11%, 7 YEARS
4.712
Present value
5035111.264
Step3
Computation of present value of salavge cash inflows
Particulars
Amount
Capital gain
0
Less: tax
0
After tax
900000
PVF @ 11%, 7 YEARS
0.482
Present value
433800
Step 4:
NPV =
-1531088.736
Since npv is negative is not feasable to invest
QUESTION 2
Particulars
Option1 Current assets 60%
Option1 Current assets 25%
sales
10000000
10000000
Expected current assets
6000000
2500000
Fixed assets
10000000
10000000
total assets
16000000
12500000
Debt
8000000
6250000
Equity
8000000
6250000
EBIT
3000000
3000000
Interest @10%
800000
625000
EBT
2200000
2375000
Less: Tax
880000
950000
EAT
1320000
1425000
Return of equity
16.5
22.8
Current asssets 25% has more return
ssame as option2 is more risky
QUESTION 3
a)
Cash dividend paid=
5256000000
b)
Number shares
925790000
c)
Net Income
11872000000
d)
Current market price
149
e)
Dividend per share = a/b
5.67731343
f)
Dividend yield e*100/d
3.81%
g)
Earnings per share = c/b
12.82364251
h)
Dividend pay out ratio = a/c
44.27%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.