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1)Intro Emily Lim owns and runs an ice cream parlor in San Diego
1)Intro Emily Lim owns and runs an ice cream parlor in San Diego. Last year, she had sales of $490,000 and an average tax rate of 30%. She spent $49,000 on ingredients, $24,500 on utilities, and $88,200 to rent the premises. Emily has a few employees and paid them $98,000 in wages in total. She also paid herself a salary of $73,500 and spent $49,000 to pay for employee benefits. A few years ago, Emily borrowed money to buy the ice making equipment. Last year, she paid $24,500 in interest on that loan. Depreciation for the equipment was $14,700. Attempt 4/7 for 10 pts. Part 1 What was operating income (EBIT) for the year? 0+ decimals Submit | Attempt 1/7 for 10 pts. Part 2 What was net income for the year?
2)ABC limited is considering implementing a project X (New manufacturing machine). The following data has been provided in respect of the project
1. The cost of the project is Sh. 2 Million
2. The WACC of the company is 12%
3. The useful life of the project is 5 years
4. Depreciation method is straight line
5. Salvage value is expected to be Sh. 200,000
6. Incremental quantity produced and sold is 100,000 units
7. Variable cost per unit is Sh. 60
8. Tax rate is 30%
9. Contribution margin is Sh. 40
10. Fixed costs have been estimated at Sh. 500,000
Required: (i) Estimate the net cash flow from the project for years 1, 2, 3, 4 and 5
(ii) Estimate the Net Present Value of the project
(iii) Advise the company based on the Net Present Value (NPV)
Expert Solution
1)
1.Calculation of operating income(Earning before Interest and Tax)
EBIT=Sales-Ingredients-Utilities-rent-salaries-employee benefit-Depreciation
=$490,000-$49,000-$24,500-$88,200-$98,000-$73,500-$49,000-$14,700
=$93,100
2.Calculation of net income(Profit after tax)
Net Income=(EBIT-INTEREST)(1- tax rate)
=(93,100-$24,500)(1-0.30)
=$48,020
2)
Variable cost per unit is 60 & contribution is 40.
Hence Selling Price = 64+40= 100.
We know that depreciation is a tax-deductable expense.
Calculation of savings on Tax p.a due to depreciation:
(2,000,000-200,000) / 5years * 30% tax = 108,000
1) Calculation of Cash flow for year 1 to 5.
Particulars 1 2 3 4 5
Purchase machine (2,000,000)
Sales Made 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000
(100,000/5*100)
Variable Cost p.a (1,200,000) (1,200,000) (1,200,000) (1,200,000) (1,200,000)
(100,000/5*60)
Fixed Cost (500,000) (500,000) (500,000) (500,000) (500,000)
Savings on tax 108,000 108,000 108,000 108,000 108,000
Sale of Machine salvage - - - - 200,000
Net Cash Inflow (1,592,000) 408,000 408,000 408,000 608,000
(Net Cashflow for all 5 years combined = Sh 240,000)
2) Calculation of NPV of the Project
Year Net Cashflow Discounting Factor @12% Present Value
1 (1,592,000) 0.893 (1,421,428)
2 408,000 0.797 325,255
3 408,000 0.712 290,406
4 408,000 0.635 259,291
5 608,000 0.567 344,995
NPV= (201,481)
3) Advice to company on basis of NPV
As we can see from above calculations, even though we get a psoitive net cashflow of Sh. 240,000 over the period of 5 years... the Net Present Value (NPV) of the cashflows comes to Negative Sh. 201,481.
Hence the company is adviced to not continue with this project since NPV is negative.
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