Scenario Questions
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Angola Superheros
Angola Superheros, Inc. is considering launching a production of a new superhero toy. The production and sales are expected to last 4 years. The project would require a new machine, with a cost of $1,000,000. The machine would be depreciated using the straight-line method over 8 years to zero value after year 8. After 4 years, at the end of the project, the machine is expected to be sold for $30,000. The company estimates that 40,000 toys would be sold annually, at a selling price of $20 per unit. The variable cost of producing each unit is estimated to be $5. In addition, the company will have to pay fixed costs equal to $35,000 each year. The relevant cost of capital is 14%, and the company faces a 25% marginal tax rate.
a. Compute the project’s cash flows in years 0-4, calculate the net present worth of the project and its internal rate of return, and determine whether the project should be accepted. Explain your answer.
b. Run a Monte Carlo simulation, varying the variable cost per unit, the annual fixed cost, and the number of units sold. Assume that the variable cost per unit has a mean of $5 and standard deviation of $0.20, that the annual fixed cost has a mean of $35,000 and standard deviation of $2,000, and that the number of units sold annually has a mean of 40,000 and standard deviation of 1,500, and that all three variables follow normal distribution. Compute the present worth of the project for 100 simulation runs. Based on the simulation results, compute the average net present worth and the threshold for the 5% of worst possible outcomes. Comment on the results, the uncertainty of the project’s net present worth, and whether the project should be accepted.
c. Use the data table function to construct a table showing the net present worth of the project, while varying the selling price per unit and the cost of capital. Use the following selling prices in your table: 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, and 25. Use the following cost of capital in your table: 9%, 10%, 11%, 12%, 13%, 14%, 15%, 16%, 17%, 18%, and 19%. Comment on the sensitivity of the project’s present worth to the cost of capital and the selling price per unit.
Angola United Theaters
Angola United Theaters, Inc. is considering opening a new movie theater in Angola, Indiana. The relevant cost of capital is 8%. The purchase, renovation, and modification of a downtown building would require an initial investment of $1.5 million. The theater is expected to be operational for 25 years. After 25 years, the property would be sold for $1 million. The annual operating cost is equal to $100,000 plus $2 per customer. The annual revenues are estimated at $15 per customer. Determine the minimum number of customers per year that would result in accepting the project. (Hint: use annualized worth and solve for the number of customers. Do not use Goal Seek or Solver; perform all of the necessary calculations directly in the Excel cells.)
JP Phentar Construction
JP Phentar Construction: Case Study JP Phentar has owned and operated his construction company for 27 years and is currently interested in building a custom home for his own family. Phentar Construction has specialized in large and exotic custom homes built in areas that present challenges, such as heavily wooded and rocky terrain, hillsides, and sandy beach sites. Phentar Construction has built large custom homes for executives, heads of state, and movie stars around the world; those projects generally include interesting and challenging amenities for construction companies to manage in the course of building homes.Phentar is pulling out all the stops on this construction project to include things in his own home that his family can enjoy although they are typically out of the norm for most family residences. Phentar has purchased three acres of foothill terrain that include several large rock outcroppings that have to be removed for the construction of an 8,500 square foot six-bedroom, six-bathroom home. This home will also include an elaborate game room with professional pool table and arcade games, a large family room with rock fireplace, and a fully functional home theater room with large-screen TV and surround sound and theater seating. The home will also feature as its primary centerpiece a 35,000-gallon saltwater fish tank that will start at the main floor in the center of the house and extend for two stories to the ceiling. This fish tank will include a large rock wall covered with all manner of coral and sea urchins, flowing water movement, and it will be stocked with an elaborate display of tropical fish. The exterior of the home will include a large pool with spa and a covered patio with full outdoor kitchen, including a fully functional brick fire oven .Because Phentar has built homes with similar amenities in the past, he knows all too well several of the contractors required to outfit these types of amenities can present challenges in cost estimation, level of quality, and ability to stay on schedule. Concerns with this particular project lie within clearing the initial acreage of large rock, and specialized amenities such as the game room, theater room, and fish tank that can present challenges during the scheduling of these activities in the course of building the home. There can be serious issues in the timing of these activities because they can affect other areas of the home during construction. Phentar is confident this project can be completed if proper project management tools and techniques are implemented to monitor and control critical activities through the course of this project life cycle. Answer these questions in a 1,050- to 1,400-word paper.
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Determine what information-gathering tools would be most effective on this project and what activities would need to be monitored.
2. Based on data that would be generated from work activities, what types of analytical tools could be used to determine project status? 3. Can any corrective actions be initiated?
RBC’s operations
What are the advantages of the possible upgrading of RBC’s operations in Thailand to a branch status?
Bond Issue
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Using a Word document, complete the requirements of the Mini-case “Financing S & S Air’s Expansion Plans with a Bond Issue”, located at the very end of Chapter 7 in your course textbook.
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Your response should take the form of a memo, as explained in the case.
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For each of the ten bond features listed, briefly describe the likely impact of each of the features on the coupon rate demanded by potential bond investors when this new bond is issued. Will it cause the required coupon rate to be higher or lower?
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In addition, for each of the ten bond features listed, briefly describe the advantages or disadvantages, from S&S Air’s perspective, of implementing that feature with the newly-issued bond.
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QUESTIONS
The security of the bond—that is, whether the bond has collateral.
The seniority of the bond.
The presence of a sinking fund.
A call provision with specified call dates and call prices.
A deferred call accompanying the preceding call provision.
A make-whole call provision.
Any positive covenants. Also, discuss several possible positive covenants S&S Air might consider.
Any negative covenants. Also, discuss several possible negative covenants S&S Air might consider.
A conversion feature (note that S&S Air is not a publicly traded company).
A floating rate coupon.
price level adjusted mortgage (PLAM)
A price level adjusted mortgage (PLAM) is made with the following terms: Amount $200,000, Initial interest rate 4 percent, Term 30 years, Payments to be reset at the beginning of each year. Assuming inflation is expected to increase at the rate of 6 percent at the end of year five. (4/. )
a. Compute the payments at the beginning of year 3(BOY3).
b. What is the loan balance at the end of the fifth year?
c. What is the yield to the lender on such a mortgage?
amortizing mortgage
A partially amortizing mortgage is made for $60,000 for a term of 10 years. The borrower and lender agree that a balance of $20,000 will remain and be repaid as a lump sum at that time. If the interest rate is 7 percent, what must monthly payments be over the 10-year period?
net operating income
A 1,500 square foot office space is leased at SAR 14.00 square foot. The space is vacant one month out of the year. Office expenses are SAR 7.50 per square foot and an expense stop is set at SAR 6.50 per square foot. What is the annual net operating income?
maturity risk premium (MRP)
If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.
A. True B. False
