Project Management Homework Management Coursework

Provide all calculation details either in a separate document on in the space after each question. Place your final answers on the last page in the table provided.
Scenario One:
Uncle Sam’s Manufacturing Co. produces metal stamping machines. After five years, the once successful line is no longer selling well, so the company is considering production of an improved line of machines incorporating new green technology. This can be done by buying needed production equipment. There is a six-month manufacturing, delivery, setup, and training delay before the equipment will be ready for production. The company wants to start producing the new line of machines in January next year. Two options are available – lease or buy.
Buy Option – The entire purchase price of the production equipment is $800K and is due at the time of the order. The cost of capital for this purchase is 7%. Assume: (1) the equipment has no residual value at the end of the fifth year and (2) there are no taxes.
Lease Option – The total lease cost is $700K. A $75K deposit is due at the time of the order. The remaining portion of the first year’s lease payment ($65K) is due in January next year. The other four annual lease payments ($140K each) are due in January of production years 2, 3, 4, and 5. The cost of capital for leasing is 16%. Assume no taxes.
Revenue from sales of the new line of metal stamping machines is expected to be:
* Year 1 - $610,000
* Year 2 – $500,000
* Year 3 – $301,000
* Year 4 – $200,000
* Year 5 – $101,000
1 Calculate the
1 net present value of both the new purchase option and $677,109.13
2 the lease option. Show all work. $780,081
Year

Inflows

Outflows

PVIF at 16%

PV

0


($75,000)

1

($75,000)

1

$610,000

($65,000)

0.8621

$469,827.59

2

$500,000

($140,000)

0.7432

$267,538.64

3

$301,000

($140,000)

0.6407

$103,145.89

4

$200,000

($140,000)

0.5523

$33,137.47

5

$101,000

($140,000)

0.4761

($18,568.41)






PV




$780,081

3 Determine the best option for Jones and justify your answer.
The lease option is the best option as it has higher NPV, which indicates higher returns and maximizes value.
2 You used the Excel NPV function with the correct discount rates to calculate NPV and you got the following values: Buy – $632,812.27; Lease - $672,483.77. What did you do wrong?
In both cases it is likely that a higher discount rate was used, and for the lease the total lease cost is $700K needs to be distributed across the period.
3 Calculate IRR for
4 Purchase option 37.25%
5 Lease option 582%
6
4 Assuming projected inflows and outflows are accurate, under what conditions can Uncle Sam’s expect to see a return equal to IRR? Is this realistic?
The project will get higher returns when the IRR increases, and there are no unexpected cash outflows.
Other Related Questions:
5 Based on the NPV profile shown below, what is the approximate internal rate of return (IRR)? 6.7%
6 You work for a company whose primary long term financial goal is to undertake projects that maximize company value. You have been asked to provide a recommendation with respect to ranking three mutually exclusive projects. The first project has a NPV of $200K and an IRR of 10%; the second has a NPV of $180K and an IRR of $12%; the third has a NPV of 220K and an IRR of 9%. How would you rank the projects? Explain.
The project with the highest IRR has the lowest NPV and since the NPV measure is preferred to maximize value, the third project would be ranked 1st followed by the first project and then the second project at NPV $220k, $200k and $180 k respectively.
7 Using appropriate financial analysis tools (e.g., NPV, IRR, and payback analyses), your company has already identified several independent projects that will add value to the company. Unfortunately, the company has an insufficient capital budget to undertake all of the projects and management has declined additional debt or equity financing efforts to increase the capital budget. What recommendation would you make for selecting the appropriate projects?
The Net Present Value of an investment is the sum of all the net cash inflows expected from the project, minus the value of the outflows including the initial investment. From the NPV perspective the NPV, projects are chosen if they have positive NPVs, those with higher IRRs are also preferred, while those with the shortest payback time are chosen using this criteria (Larson & Gray, 2012). When the three measures give inconsistent results the NPV criteria is chosen.



ScenarioTwo:
Your company experienced some cash flow issues during your last project that caused the project to be terminated early without achieving all its original objectives. Despite being told there is nothing to worry about, you decide to investigate the company’s financial status.
8 What three financial statements should you look at first? What will they tell you?
I would check the income statement, balance sheet and statement of cash flows. The income statement shows the profitability levels where cash receipts and expenses are inflows and outflows respectively. The balance sheet is the statement of financial position at a certain time, where changes in assets and liabilities indicate the money coming in and spent. The cash flow statement is the budget of the company and indicates the flows of income and expenses of money that a company has in a given period (movements of cash).
9 You find the company has assets of $22M, total equity of $12M, and net cash flow of $6M per month, what are the company’s total liabilities?
Net Cash Flow = Cash Receipts - Cash Payments (during a period of time)
Assets = Liabilities + Equityliabilities =22M-12M=10M
10 You also note the company depreciated an asset, purchased for $6M, over seven years using the straight-line method. What is the total depreciation expense (to the nearest dollar) at the end of year 4?
Depreciation per year= $6m/7= $857,142.86
Depreciation, 4 years=$857,142.86*4$3,428,571
Based on the depreciation notes, you conclude that depreciation expense is:
* A cash expense
* Equal each year the asset is depreciated
* A non-cash expense
* A and B above
Note: Disregard question 10 when answering question 11.
You calculate the company’s Current Ratio and find it to be 3.5. What specifically does this tell you?
The current ratio is a liquidity ratio that measures a company's ability to pay the short-term obligations, and is calculated as total current assets divided by its total current liabilities. The ratio means current assets are 3.5 times as large as current liabilities and the company can meet short-term financial obligations.
You calculate Return on Assets (ROA) and find it to be 5.39% based on net income (available to common stockholders) of $350,000 and total assets of $6,500,000. You dig further and find that sales were $12,000,000. What does this information tell you about the company’s net profit margin and total asset turnover? Provide values to support your assessment.
ROA = Net Income / Total Assets
The Profit Margin=Net income × Net Sales =350,000/12,000,000=2.92%
Asset turnover =sales/total assets=12,000,000/6,500,000=1.85
The Profit Margin ratio indicates for $ 100 of net sales $ 3 dollars is the net income.
The asset turnover is sales (revenue) /total assets and reflects the effectiveness of the company in managing the assets to generate sale (Gibson, 2013). In the year the value of sales is $1.85 relative to $1 of the total assets.
Scenario Three:
You are evaluating a work breakdown structure for adherence to WBS core characteristics. Th...