9.15 Arkwright & Sons is a partnership where the partners all have a marginal tax rate of 38%, They would like you to evaluate a project for them and have provided the following details: coal ed Year 3 Aims : Reverve nooo 5000 _—*t20000 90000 Cost of goods sold 12100 12550 132009900 “Depreciation ~~ OOO_C~C*«waS OD —~«ROOOD «35000 = ITO OOD Earnings before tax 27900 37350 46800 25100 ‘+ The initial investment in the project is $200 000 and an additional investment of $10 000 is required at the end of year 2. iasmenns + The asset purchased at the commencement of the project will be sold at the end of the project for its book value. —=? OC —&D =. ‘+ Working capital will be 9% of revenues for each year. The working capital investment has = —~ fo be made ai the start ‘oFeach period’ AlfWorking capital will be recovered. 3, See (@) estimate the relevant cash flows for the project (b) estimate the payback period 0 rear L ear2 | _year3 jear 4 Cash flow =209 900 79248| 70107] 84116] 101 062 Cumulative CF 79248| 149355| 233.471 209 900-149 355 _ 60545 _ 4 7199 84116 84116 * Payback =2 years and 37 weeks 46/ 7—(c) calculate the accounting rate of return oS ‘2 (a) calculate the NPV for the project a (®), (©) and (4) 0 | yeari | year? | year3 | year4 Initial investment =200 000 =10 000 Working capital change 9900 450 -450| 2700] 8 100 Sales Ti0000] 115000] 120000] 90000 Cost of goods sold i2100| _12650| _13200| 9900 97900 | 102350] 106800] 80 100 Depreciation 50.000] 45000 | 40000! 35.000 ‘Taxable income 47900 | 57350| 66800] 45100 Tex 1g202| 21 793| 25384 17138 Op CF tax = After tax CF 79698| 80557| 81416 | 62962 Terminal value 30.000 Net cash flow 209900 79248 «70107 ~~ ~<84116 ‘10 1062 PVE 1 0.9091 0.8264 0.7513 0.683I Sales Cost of goods sold Operating CF investment Depreciation Taxable income Tax Op CF ~tax = After tax CF PVE PY of cash flows NPV NPV ‘The NPV remains positive so the recommendat = year 1 year? ¢ year 3 year4 year year 6 year =2 100 000 ; 900000} 900000} 00000) — 900000] — 900000) — 900.000} 900.000 270000] _-270000| _ -370000| _-270 000| _-270 000 | __-270 000| _-270 000 630000] 630000] 630000] 630000] 630000 630000] 630 000 =300 000 | -300 000 | 300.600 |" —300 000 | -300 000 | ~ —300 000 | —300 000 330000) 330000) 330000] 330000] 330000) 330000 330000 0 0 o| -99000| -99000| _-99 000| _-99 000 2100000 ~~ 6300006300000 630000531000 531000531000 «531.000 1 0.885 0.7831 0.6931 0.6133 0.5428 0.4803 0.4251 2100000 557550493353 «436653 325662.3 2882268 © 255039.3225728.1 482 212.5 $482 212.50 is unchanged — the project should be accepted. “*loa Pv NPV IRR 9.18 -209900 --72044-«=« 57936 = 63.196 69025 $52 302.48 21% Using excel function McAuber & Sons are a family owned partnership that sells books by mail order. Partnership income is shared among the three partners who all have a marginal tax rate of 47%. The corporate tax rate is 30%. ‘The youngest partner has suggested that posting catalogues and asking customers to return order forms by mail is 2 bit outdated. She has suggested that the firm sct up an online catalogue that allows customers to order books and pay using a credit card from the customer's computer. The computerised system would replace the current mail system. ‘The current mail system used by McAuber costs S15 per 100 customers to process. Each ‘customer spends an average of $30 per order and this is expected to continue under the new system. : Netlink Ltd have agreed to design and maintain the McAuber & Sons website for an upfront fee of $500 000. There will also be an ongoing service fee of $10 per 100 customers that order from the website. The contract with Netlink is for 4 years. At the end of 4 years, the entire ordering system will be reviewed. If McAuber decide to terminate the ‘contract with Netlink prior to the contract date, they will have to pay Netlink a penalty of $100 000. ‘The new online advertising and ordering system is expected to increase sales from the current level of $750 000 p.a. to $1.2 million p.a. for the next 4 years. Determine the relevant cash flows for the project and calculate the NPV using a required return of 10%, Show all relevant equations and calculations. Should the ordering system be changed? 7 Incremental sales * = new sales — current sales ‘Number of new customers ‘Number of old customers 1200 000-750 000 = 450 000 1200 000 / 30 = 40 000 pa 750 000 / 30 =25 000 pa Incremental costs = new costs ~ old costs 10 x 40 000 / 100) — (15 x 25 000 / 100) 4000 —3750 = 250 year 1 year? year3 year4 initial outlay =so0000 incremental sales 450000 450000 450000 450000 incremental costs =250 =250 =250 =250 449750 449750 49750 49750 Tax at 47% 211382.50__—D11382,50_~211382.50_-211382.50, After tax CF "238367.5 2383675 238367. 238367.5 PVE 0.9091 0.8264 0.7513 0.683 PV of CE 716699.89 1969869 179085.5 162805 NPV 255 577.30islono * r +x0q se8 v 0 Joo atp uo stoued sejos Jo Yoo] atp ax] ow Fret somoIq nok — onampsoy suossrwo se8 asnoqtser 0} ainquitios 104 Soop pure a|qeMotos St ABIOUD Avfos — jeyMoMMTONAT « OpNpOUT ]YSTU SIO}ORF [WLOURT-UON : GnoIsTep JuamnysaAur Iq UY apjsuod 1mByex JoMoXq anos sx0yDE5 [wFUEEY-uoU MuB 2x23 ay (q) -yoofoud amp Jo aft atp s040 sys09 orp pu oUAsOAKE JeNIU eyp ZopIsHOD MOA wats, LONGO 1S09 3se”0| om st yf “woysks sores seB of pustUTODAr pinow no ‘a[drourd wonesrETKeUE TNTeIM YX UO pasegl 6s'e09I- | SEE E- veoel- | carr eceici-_| vo119 01 enna A Stoqnorg ano asqupxeut 0} pusuruoses nox inom maysis yor ‘Aauoq Xe} UE c ayes9uad ou op sur9ss4s 49}6s 304 OP Pu %zT St JUdED Fo yS09 s,s04,0Iq AMOK JY (E) savak 7] Jo att yasn ¥ anny pinom wiaysis sxado “w'd QOZIS PUB [[EISU! 0} OOSTS Jo 3509 ¥ MPU MarsKs apNDaI TY + savod Sy Jo att yasn e axvy inom warsks SM “81809 Sunesodo “wd gogs PUE TTeISUE 0} OODES 3809 PINOM YoIya waysKs su y + oo} [a SuIpTING ayy yeH) auMNsse UES NOK puL sxEaK OE 105 JSET TEM WOISKS Us, ‘sis00 Supvsodo jonuue OOS PUL [TeISU 04 OO06S 1S09 POM Gory wHOxSKs avjos Y « ssoapeusayTe aay Su}ssoqfos aq) WL nos paprrosd soy aff “woySAs Joye 30H ays a9e4d0.1°0} spo9U pue yddosd [RINDI E SUMO tOMJOIq NOX G1°6 SIU, “89809 31 uur orp 01 OF'LLS SS7$ Jo aswaIONT Ue SHUG WaIshs mou om asneoVq PedUEND aq PInoYS Worsks SULIOPO a4