FIN 305 Lecture Notes - Lecture 4: Income Statement, Profit Margin

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18 Oct 2017

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& amortization equipment: allocating the cost of intangible assets over a period of time (ex: patents) = (cost amount of equipment estimated salvage value(cid:524) / equipment(cid:495)s estimated useful life. Salvage value the amount that the business estimates it will be able to get when it sells the equipment. Interest - cost of borrowing other people(cid:495)s money %p. a. P principle amount outstanding i annual interest rate (p. a. ) t = fraction of year we want to compute interest. Bank loan to partially finance automated packing machine: original principal: ,000, term: 5 yrs, monthly principal payment: ,500. Income before tax to be determined before arriving at the bottom line net income. Therefore, net income is income before tax income tax expense (cid:498)taxable )ncome(cid:499) Small business (cid:523)private co. , (cid:494)active business(cid:495)(cid:524): (cid:883)(cid:883)%-19% (cid:494)big business(cid:495) (cid:523)public co. (cid:524): (cid:884)(cid:882)% - 31% Operating leverage: not all expenses are in gear with sales.

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SingTel Ltd. is an Australian operated company with mainly Singaporean resident shareholders. The company is currently in the process of comparing two mutually exclusive machines for use in a new project with Machine A costing $30,000, having a useful life of five years and machine B costing $45,000 and having a useful life of 10 years. Cash inflows from sales are expected to be $22,000 p.a. from each machine, while total cashbased operating costs are expected to be $10,000 and $8,000 respectively for each machine. All revenues and costs are assumed to occur at the end of the respective years for simplicity of assessment. Machine A is expected to have a salvage value of $4,000 at the end of 5 years, while at the end of 10 years machine B will be worthless. Depreciation for accounting and tax purposes is calculated on a straight-line basis on the original cost of each machine with no consideration in depreciation calculations for any expected salvage value. The company has an aftertax required rate of return of 14% and pays income tax at the rate of 40% in the year following the year of income (that is, taxes levied on year 1 income are paid at the end of year 2). a) Provide some reasons as to why the alternative machines are said to be mutually exclusive for the company. b) Record the relevant cash-flows for each machine on a time (cash-flow) diagram. c) Advise the company which machine (if any), should be purchased and justify all the processes you have used in order to reach your decision. d) (i) Why is NPV considered to be the best method for capital budgeting? What does the NPV tell you? (ii) When evaluating two mutually exclusive projects with unequal lives, is the project with the higher NPV better? Why or why not?

periwinklefly569

An investment alternative in an engineering project requires a capital cost (to purchase and install equipment) of $100 million completed at time zero. The equipment has no salvage value after it is installed. The investment will produce a stream of revenue of $48 million per year-end over a 7-year period with operating costs of $20 million per year-end. Use declining-balance depreciation for the capital cost over the project lifespan with d=20%, until the final year when you can fully depreciate the balance. The rate of taxation on the income is 38%, the inflation rate is given as 4% (applied to both revenue & cost), and the cost of capital, to be used for discounting purposes, is 8%.

i) Construct the cash flow table, calculate the after-tax annual cash flows, and determine the undiscounted payback period;

ii) Calculate the present worth, PW, for this project, based on the after tax annual cashflows.

iii) Using linear interpolation calculate the internal rate of return for this project, based on the after tax annual cashflows.

TIP: For iii), use linear interpolation to determine the interest rate that make PW=0

redhamster711

An organizationâs finances are closely linked to local and global markets. Therefore, regular monitoring of economic factors, such as employment, inflation, supply and demand, and interest rates is sure to provide beneficial information. Therefore, it is important to understand the impact of economic factors upon an organizationâs current and future operations and finances.

Using the module readings, Argosy University online library resources, and the Internet, research two to three articles on the importance of analyzing economic factors for organizations.

Then respond to the following:

Why should companies pay attention to economic factors when managing the organizationâs current and future financial information?

Consider an organization you are familiar with. Identify the economic factor that has had the most impact on the organizationâs earnings in the past 5 years.

How has this factor impacted the organization and how has the organization dealt with the impact in a positive or negative manner?

Please put the following income statement and balance sheet terms in the proper order:

Taxes, interest, gross profit, selling, general and administrative expenses, sales, depreciation, net income, cost of goods sold, and EBITDA.

For the balance sheet, please categorize the following as short-term assets, long-term assets, short-term liabilities, long-term liabilities, or ownerâs equity:

Cash, accounts payable, accruals, property, plant and equipment, inventory, accounts receivables, paid in capital, retained earnings, notes payable, mortgage, and accounts payable.

Please explain in which order the four major financial statements need to be prepared, and why.

Please also explain the three major categories of the statement of cash flows and under which category the following items belong. Also explain whether or not each item would be considered a source or use of cash for the period in question:

Inventory-increased for period
Net income-increased for period
Accounts receivables increase for period
Accounts payable decrease for period
Accruals decrease for period
Depreciation-increases for period
Stock issued
Property purchased
Bonds paid off
Inventories increase for period
Cash decreases
Notes payable increase for period
Bonds redeemed for period

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FIN 305 Lecture Notes - Lecture 4: Income Statement, Profit Margin

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