Accounting Question

Introduction

There are 100 marks available for this assignment.

For Assignment 5, you will demonstrate your comprehension of the concepts covered in Modules 8 and 9.

One of the most important roles that just about everyone in a company can be involved is capital budgeting. What projects should we go ahead with or not go ahead with? Should we invest in a project which will improve our IT systems, improve our HR systems, or perhaps start a new division of the company? Even if you are not in a finance role, it is essential that you are able to speak the same language so that you can help to determine what is appropriate as well as champion your own projects effectively. The money for these projects has to come from somewhere and is related to the capital of the company. You will consider how much of the company should be financed by ongoing cash flow versus raising capital from equity holders or borrowing.

Make sure to clearly explain your work so that your Open Learning Faculty Member can give feedback. You may get partial marks, even if your final answer is incorrect. You will submit a single Word document for this assignment, please review the

Submission Guidelines

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Instructions

Complete the following in the order listed, and label your work.

Parker Company is considering two mutually exclusive projects. Consider the information below, and provide the requested details. (40 marks)YearCash flow P1Cash flow P20(350,000)(50,000)145,00024,000265,00022,000365,00019,5004440,00014,600

What is the payback period for each of these projects? Which project will the company choose if it applies the payback period decision rule?

If the required rate of return is 15%, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule?

If the required return is 15%, what is the profitability index for each of these projects? Which project will the company choose if it applies the profitability index decision rule?

What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct?

Over what range of discount rates would the company choose Project 1? What range would cause the company to choose Project 2? What is the crossover rate at which the company be indifferent between these two projects? Explain.

Which project should you choose? Why?

Board Gear Corp. (BG) is considering manufacturing a new model of paddleboard. This project would require an investment of $315,000 plus an additional $32,000 in working capital. The equipment is in the 20% CCA rate class, and BG has a tax rate of 25%. BG thinks they can sell 200 boards a year for 5 years, after which the equipment will have a residual value equal to its undepreciated capital cost and will be sold for that amount. The working capital will be recovered. The boards will sell for $1,800. Fixed yearly manufacturing costs are $90,000, and variable costs are $600 per board. BG’s cost of capital is 12%. BG uses the accelerated investment incentive, so CCA in Year 1 is 1.5 times the prescribed rate. Calculate the yearly cash flow and the NPV of the project. Should they go ahead with the project? Provide all calculations to support your decision.

Refer to the observed capital structures given in Table 16.7 from Section 16.9: Observed Capital Structures of the textbook. What do you notice about the types of industries with respect to their average debt/equity ratios? Are certain types of industries more likely to be highly leveraged than others? What are some possible reasons for this observed segmentation? Do the operating results and tax history of the firms play a role? How about their future earnings prospects? Explain

Hot-Shoe Hikers is an all-equity firm with a total market value of $715,000. The firm has 46,000 shares of stock outstanding. Management is considering issuing $158,000 of debt at an interest rate of 8% and using the proceeds to repurchase shares. Before the debt issue, EBIT will be $63,200. What is the EPS if the debt is issued? Ignore taxes.

A gym owner is considering opening a location on the other side of town. The new facility will cost $1.56 million and will be depreciated on a straight-line basis over a 20-year period. The new gym is expected to generate $577,000 in annual sales. Variable costs are 40% of sales, the annual fixed costs are $94,100, and the tax rate is 21%. What is the operating cash flow?

Submission Guidelines
Each assignment needs to be sent in as a typed Word document. If you copy anything from
Excel, use a basic copy/paste. Do not copy as a picture. A picture in Word does not allow
further editing, adding comments, or adjusting the column width. Leave unformatted lines
between questions and parts of questions so that any feedback does not shrink to fit your
columns.
Please take a few minutes to review these assignment guidelines and tips that will help you
save time and probably improve your grade:
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Complete all parts of the assigned questions, and include all of your calculations.
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Read each question carefully, and answer only what is asked. Is the question asking
you to provide an explanation? If so, provide one. If no explanation is required, do not
provide one, since you will not be awarded marks for your extra effort.
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Answer the questions in the order provided, and clearly label each question.
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Follow the instructions in the question. If the instructions request a specific format be
used to answer the problem, use it! It is essential that your answers be presented in
an understandable and complete fashion. Use illustrations from the textbook and
module notes as guides to presentation.
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To gain full marks on theory-based questions, examine the situation from a number
of different perspectives. For example, if you are asked to comment on whether
providing detailed information in the financial statement is a good or bad thing, you
would want to consider the question from the various stakeholders’ point of view.
Stakeholders, in this instance, could include owners, managers, employees, investors,
and regulatory agencies.
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Use dollar signs and underlining, as appropriate.
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Please compose your work in 12-point Arial, Calibri, or Verdana font.
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Do not use red text colour, as your Open Learning Faculty Member’s comments will
be in that colour.
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Put the course number, your name, student number, and assignment number at the
top of the first page of each assignment.
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Before submitting your assignment, ensure that you have answered all parts of each
of the assigned questions. Recheck your calculations, line alignments, and formatting.
Check that you have used proper presentation and required headings.
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When you are ready, send your assignment to your Open Learning Faculty Member.
Sending each assignment individually, as opposed to saving them up and sending
several at once, will help you, as your Open Learning Faculty Member’s feedback on
one assignment will usually help you with a subsequent one.
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When submitting your assignment, name your Word file as follows: Course number,
surname, and assignment number. Thus, if your name is Kal Smith and you are
submitting Assignment 2, you would name your file “FNCE2121_Smith_2.”
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Include the following information on your covering message: Course number
(FNCE2121), name, and assignment number.
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