Consultant for Medicals Inc., Manufacturer

Medicals Inc.

Consultant for Medicals Inc., Manufacturer for $14 Only (Instant Download)

CASE 1

You have been hired as a consultant for Medicals Inc., manufacturer of medical devices. The company projects unit sales for a new dental implant as follows:

Year                       Unit Sales

1                             73,000

2                              86,000

3                              97,000

4                              68,000       

  • Production of the implants will require $1,500,000 in net working capital immediately, all of which will be recovered at the end of the project.
  • Total fixed costs are $4,200,000 per year, variable production costs are $255 per unit, and the units are priced at $375 each.
  • The equipment needed to begin production has an installed cost of $8,500,000. This equipment qualifies as three-year MACRS property (depreciation rates are 33.33% for Year 1, 44.45% for Year 2, 14.81% for Year 3, and 7.41% for Year 4).
  • In four years, this equipment can be sold for about 20 percent of its acquisition cost.
  • The tax rate is 21 percent and the required return is 24 percent.
  • The company imposes a payback cutoff of three years for its investment projects.

QUESTIONS:

  1. Complete the pro forma and determine total cash flows for each year of project’s life.

Understanding the case and the process 10 points, finding the right cash flow 10 points (2 per year)

  • Calculate the following investment criteria for the project:

(a) Payback period (5 points) (2.5 for the right formula/approach and 2.5 for the right result)

(b) Profitability Index (PI) (5 points) (2.5 for the right formula/approach and 2.5 for the right result)

(c) Internal rate of return (IRR) (5 points) (2.5 for the right formula/approach and 2.5 for the right result)

(d) Net Present Value (NPV) (5 points) (2.5 for the right formula/approach and 2.5 for the right result)

  • Explain your decision whether you recommend accepting or rejecting the project. (10 points) (3 points for the right answer and 7 points for the explanation)
Year 0 1 2 3 4
Sales revenues          
Variable Costs          
Fixed Costs          
Depreciation          
EBIT          
Taxes          
Net income          
Operating Cash Flow          
Capital spending          
Net Working Capital          
After-tax salvage value          
Total Cash Flow          

Sample Answer:

Unit Sales                73,000                  86,000                 97,000                 68,000
Year01234
Sales revenues (@375 per unit)             (1,500,000)       27,375,000        32,250,000         36,375,000         25,500,000
Variable Costs (@ $255 per unit)                               –         18,615,000        21,930,000         24,735,000         17,340,000
Fixed Costs                               –           4,200,000           4,200,000           4,200,000           4,200,000
Depreciation (from row no. 15)                               –           2,833,050           2,518,959               466,217               198,719
EBIT (1-2-3-4)                               –           1,726,950           3,601,041           6,973,783           3,761,281
Taxes (value of row 5 × 21%)                               –               362,660              756,219           1,464,494               789,869
Net income (5-6)                               –           1,364,291           2,844,822           5,509,288           2,971,412

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Net Present Value (NPV) Calculations Using Each Model

 Net Present Value (NPV) Calculations Using Each Model

Need the Net Present Value (NPV) calculations each model using the following techniques and ignoring income Net Present Value (NPV) Calculations Using Each Modeltaxes: Dr. David Dunn, head of the radiology department at Grant Clinic Inc., is adding a new piece of diagnostic equipment to the department. Two similar models are offered by two different vendors, and both models would serve the needs of the clinic. Both also have an estimated useful life of five years, with no salvage value at the end of five years. The only difference between the two models is the cost and estimated annual labor savings, as shown below: Model A Model B Cost, including installation $120,000 $110,000 Estimated annual labor savings $40,000 $32,000 The straight-line method of depreciation is used on the books. Senior management of the clinic has established a target rate of return of 15% for all equipment with a useful life of over two years and a desired payback period of three years.

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Mini Case: Getting Off the Ground at Boeing

CFM3 Ch 09 Mini Case:  Getting Off the Ground at Boeing in $9 only

Objective:

This case asks the student to calculate the incremental cash flows and use the NPV and IRR methods to evaluate Boeing’s investment project to build a new plane. This project, because of its size and importance to Boeing, was potentially a “make-or-break” investment for the firm. It was therefore critical to Boeing to “get it right” when it performed the capital budgeting analysis.

Case Discussion:
By the time Boeing announced the newest addition to its fleet, much of the preliminary work was already computed. The new plane was an enormous undertaking. Research and development, begun two and a half years earlier, would cost between $4 billion and $5 billion. Production facilities and personnel training would require an additional investment of $2.0 billion, and $1.7 billion in working capital would be required. The exhibit included in the case furnishes profit, depreciation, and capital expenditure projections for the project.

Clark Paints: Calculate Annual cash flows, Payback Period NPV & IRR

Clark Paints: Calculate Annual cash flows, Payback Period NPV & IRR

Clark Paints: The production department has been investigating possible ways to trim total production costs. One possibility currently being examined is to make the paint cans instead of purchasing them. The equipment needed would cost $200,000, with a disposal value of $40,000, and it would be able to produce 5,500,000 cans over the life of the machinery. The production department estimates that approximately 1,100,000 cans would be needed for each of the next five years.

The company would hire three new employees. These three individuals would be full-time employees working 2,000 hours per year and earning $12.00 per hour. They would also receive the same benefits as other production employees, 18% of wages, in addition to $2,500 of health benefits.

It is estimated that the raw materials will cost 25¢ per can and that other variable costs would be 5¢ per can. Since there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted.