Tab 3 question and question 3

031422

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Tab 3 question and question 3
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Project 4 Questions – Report Template
Instructions: Answer t

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**Instructions:** Answer the five questions below, based on the information that you developed in the Excel workbook. Provide support for your reasoning from the readings in Project 4, Step 1, and the discussion in Project 4, Step 3. Be sure to cite any sources used in proper APA (7th ed.) format.

Provide a detailed response below each question. Use 12-point font and double spacing. Maintain the existing margins in this document. Your final Word document, including the questions, should not exceed 5 pages. Include a title page in addition to the five pages. Any tables and graphs you choose to include are excluded from the five-page limit. Name your document as follows: P4_Final_lastname_Report_date.

You must address all five questions and make full use of the information in the Excel workbook.

You are strongly encouraged to exceed the requirements by refining your analysis. Consider other tools and techniques that were discussed in the required and recommended reading for Project 4.

__Title Page__

Name

Course and section number

Faculty name

Submission date

**1. Present-value calculations, rather than future-value calculations, are the key to analysis in the field of corporate finance. Why is this the case? Explain the importance for Largo Global Inc. (LGI) of understanding today’s value of projected future revenues and/or costs. **

[insert your answer here]

Future-value calculations are based on interest rates over a specified time period. When it comes to making business decisions, data from future value calculations is less dependable. As a result, investors rely heavily on present value calculation, which is the current value of a future cash flow. When investors purchase a piece asset to help increase production, which will even lead to an increased future. The main factor driving the decision-making process for a go or no-go decision will be the present future value of the asset on which the decision is based.

When making business decisions or understanding how business operations work, it is critical for Largo Global Inc to understand the cash outflow and cash inflow of a present value. LGI cash inflow refers to the money brought into the business by its operations, in this case, the standard and deluxe boxes that generate revenue for LGI. Cash outflow represents the liabilities that LGI must pay as a company. Understanding this business topic will assist investors and stakeholders in forecasting LGI’s future revenue. LGI’s product price will be determined by the cost, which can be direct or indirect. It is critical for LGI to understand the significance of cost and how it will influence many decisions.

**2. Based on your calculations in Tab 2, Question 8, which offer should LGI accept for the Bowie plant? Explain why. Be sure to include the concepts of risk and potential return as part of your discussion.**

[insert your answer here]

LGI should accept offer D. This offer had the highest present value of $120.66 million when compared to the other offers with lower present values. The amount indicated that the investment would generate a higher profit than the other offers. Over the course of its life, the investment will be profitable. LGI will avoid the risk of depreciation because a cash value of $18.09 million will be paid for the first seven years and $53.05 million in year eight. A high present value indicates a high potential rate of return from selling the Bowie property to reduce costs.

**3. The proposed sale of the Bowie plant is part of a larger effort to divest the company of underperforming assets. A total of $1.3 billion in assets, with a book value of $750 million, have been identified for potential sale. Assuming that all these sales could all be accomplished in 2022, identify the major impacts on the following:**

**a. Balance Sheet, especially these accounts:**

·

**Property, plant, and equipment**

·

**Accumulated depreciation**

·

**Net property, plant, and equipment**

**b. Statement of Cash Flows, especially Long-Term Investing Activities **

**c. Income Statement, especially Net Income **

**Explain the potential impacts, both positive and negative, of these changes for LGI.**

[insert your answer here]

**4. Based on your calculations in Tab 3, Questions 1–4, should LGI proceed with the acquisition of the robotics-based sorting and distribution equipment? Explain your reasoning. How would the acquisition fit into the efforts to turn the company around?**

[insert your answer here]

LGI should continue to acquire robotics-based sorting and distribution equipment to help reduce costs that affect company revenue. The greater the present value (PV), net present value (NPV), and internal rate of return (IRR), the higher the cash flow outcomes from year 0 to year 8. LGI will be able to reduce all extra expenses by paying employees who work long hours and, as a result, will use the company’s resources during working hours. The robotic-based sorting and distribution equipment will reduce labor costs, which are a major expense for most production institutions. Reduced labor costs will allow LGI to redirect the income used for

**5. In Tab 3, Question 5, did the change in the discount rate make proceeding with the purchase more or less desirable? What do you conclude from this result? Discuss the role of discount rates in LGI’s decision-making process for capital budgeting and new asset acquisition.**

[insert your answer here]

When the discount rate was reduced from 5.98% to 5.02%, the purchase became more appealing when compared to the initial net present value. At a reduced discount rate of 5.02%, the net present value of $194.85 million is greater than $189.46 million. This amount purchases Bowie plant is more appealing to investors because they know the potential outcome of the future cash flow over the investment’s life cycle. It is critical for LGI to understand the current value of their future investment, in this case the purchase of robotics sorting and distribution equipment to help reduce company costs. In the case of capital budgeting and the acquisition of new assets, it is critical to assess and know the capital that will be budgeted, and the purchase of a production asset will bring more cash flow into the LGI revenue. The discount rate determines whether or not an investment will be profitable in the future, and it is an important factor that businesses use to make investment decisions.

Instructions | 031422 | |||||||||

Answer all questions in this workbook. Be sure to read the introductory text on tabs 1 and 3 as well as these instructions. | ||||||||||

Keep in mind that the focus of this project is corporate finance. The information generated by the accounting system is important; but in finance, decisions are driven by an analysis of cash flows rather than profits. | ||||||||||

Tab 1 contains a series of exercises on the concept of the time value of money. These exercises do not relate directly to the issues facing LGI. | ||||||||||

Tab 2 focuses on the concept of annuities. The first few questions do not pertain specifically to LGI; the latter questions do. | ||||||||||

Tab 3 pertains to whether LGI should acquire new assets that may enhance the company’s productivity and thus improve financial performance. |

011022 | ||||||||||||||

1. Briefly explain the meaning of the term “present value” in your own words. | ||||||||||||||

Present value simply means the current value or worth of a product | ||||||||||||||

2. Briefly explain the meaning of the term “future value” in your own words. | ||||||||||||||

Present value is the value of money or product in more than a year | ||||||||||||||

3. What is the future value in five years of $1,500 invested at an interest rate of 4.95%? | ||||||||||||||

($1,909.87) | ||||||||||||||

4. What is the future value of a single payment with the following characteristics? | ||||||||||||||

PV | $950 | -$1,302.47 | ||||||||||||

NPER | 6 | years | ||||||||||||

RATE | 5.4% | |||||||||||||

5. What is the present value of $65,000 in six years, if the relevant interest rate is 8.1%? | ||||||||||||||

($40,734.20) | ||||||||||||||

6. What is the present value of a single payment with the following characteristics? | ||||||||||||||

NPER | 11 | years | ||||||||||||

RATE | 5.05% | |||||||||||||

FV | $10,000 | |||||||||||||

($5,816.25) | ||||||||||||||

7. The present value of a payment is $4000. The future value of that payment in five years will be $4800. What is the annual rate of return? | ||||||||||||||

4% | ||||||||||||||

8. What is the annual rate of return of a single payment with the following characteristics? | ||||||||||||||

PV | $1,000 | |||||||||||||

NPER | 15 | years | ||||||||||||

FV | $10,000 | |||||||||||||

17% | ||||||||||||||

Time value of money (TVM) exercises

There are five variables in TVM calculations: present value, number of periods, rate of return, regular payments, and future value. If four of the variables are known, then the fifth can be calculated using algebra, a financial calculator, or a computer program such as Excel.

Excel functions for the five variables are as follows:

PV—present value

NPER—number of periods

RATE—rate of return

PMT—regular payments

FV—future value

011022 | ||||||||||||||

1. How many years would be required to pay off a loan with the following characteristics? | ||||||||||||||

PV | $11,500 | |||||||||||||

RATE | 10.6% | |||||||||||||

PMT | $1,600 | (annual payments) | ||||||||||||

14.2427882206 | ||||||||||||||

2. What is the annual payment required to pay off a loan with the following characteristics? | ||||||||||||||

PV | $14,700 | |||||||||||||

RATE | 10.0% | |||||||||||||

NPER | 10 | years | ||||||||||||

($1,537.87) | ||||||||||||||

3. Why is FV not part of the calculations for either question 1 or question 2? | ||||||||||||||

This is because the annual paymet was given | ||||||||||||||

4. At what annual rate of interest is a loan with the following characteristics? | ||||||||||||||

NPER | 17 | years | ||||||||||||

PMT | $100,000 | |||||||||||||

PV | $1,000,000 | |||||||||||||

7% | ||||||||||||||

For questions 5-8, LGI’s cost of capital is | 8% | |||||||||||||

5. LGI projects the following after-tax cash flows from operations from | ||||||||||||||

its aging Bowie, Maryland distribution facility (which first went on line in 1953) | ||||||||||||||

over the next five years. What is the PV of these cash flows? | ||||||||||||||

Projected after-tax cash flows | ||||||||||||||

Year | (in $ millions) | |||||||||||||

1 | (40) | $ (37.00) | ||||||||||||

2 | (40) | $ (34.22) | ||||||||||||

3 | (40) | $ (31.66) | ||||||||||||

4 | (40) | $ (29.28) | ||||||||||||

5 | (40) | $ (27.09) | ||||||||||||

6. LGI extended the analysis out for an additional 7 years, and generated the | ||||||||||||||

following projections. What is the PV of these cash flows? | ||||||||||||||

Projected after-tax cash flows | ||||||||||||||

Year | (in $ millions) | |||||||||||||

1 | (40) | $ (37.00) | ||||||||||||

2 | (40) | $ (34.22) | ||||||||||||

3 | (40) | $ (31.66) | ||||||||||||

4 | (40) | $ (29.28) | ||||||||||||

5 | (40) | $ (27.09) | ||||||||||||

6 | (40) | $ (25.05) | ||||||||||||

7 | (40) | $ (23.17) | ||||||||||||

8 | (40) | $ (21.44) | ||||||||||||

9 | (40) | $ (19.83) | ||||||||||||

10 | (40) | $ (18.34) | ||||||||||||

11 | (40) | $ (16.96) | ||||||||||||

12 | (40) | $ (15.69) | ||||||||||||

7. The CFO asked you to undertake a more detailed analysis of the plant’s costs, noting that while | ||||||||||||||

it is convenient for making calculations when projections result in data that can be treated like an annuity, | ||||||||||||||

this does not always represent the most accurate estimate of future results. What is the PV of these cash flows? | ||||||||||||||

Projected after-tax cash flows | ||||||||||||||

Year | (in $ millions) | |||||||||||||

1 | (40) | $ (37.00) | ||||||||||||

2 | (50) | $ (42.78) | ||||||||||||

3 | (55) | $ (43.53) | ||||||||||||

4 | (60) | $ (43.92) | ||||||||||||

5 | (70) | $ (47.40) | ||||||||||||

8. As part of a larger plan to sell off underperforming assets, LGI is considering selling the Bowie property | ||||||||||||||

and using other existing facilities more efficiently. LGI received four preliminary offers from potential buyers for the Bowie | ||||||||||||||

property. What is the PV of each offer? | ||||||||||||||

PV of each offer (in $ millions) | ||||||||||||||

Offer A | $102.17 million, paid today | $ 102,170,000.00 | ||||||||||||

Offer B | $19.85 million per year, to be paid over the next 8 years | $ (113.60) | ||||||||||||

Offer C | $201.88 million, to be paid in year 8 | 108.1955453217 | ||||||||||||

Offer D | $18.09 million per year, to be paid over the next 7 years and | $ 120.66 | ||||||||||||

a $53.05 million payment in year 8 | ||||||||||||||

9. From a profit maximizing point of view, which offer should LGI accept? | ||||||||||||||

Offer D | ||||||||||||||

10. Define the term annuity in your own words. How might the concept of an annuity impact the process of | ||||||||||||||

capital budgeting and new asset acquisition? | ||||||||||||||

Annuity is when an individual or a business acquired loan and as part of the repayment process of paying back the borrowed money paying the same amount of agreed amount over a period of time |

Tab 2 – Annuities

011022 | ||||||||||

Table 1 – Data | ||||||||||

Cost of the new manfactoring equipment (at year=0) | $ | 191.1 | million | |||||||

Corporate income tax rate – Federal | 26.0% | |||||||||

Corporate income tax rate – State of Maryland | 8.0% | |||||||||

Discount rate for the project | 5.98% | |||||||||

Table 2 – After-tax Cash Flow Timeline | ||||||||||

(all figures in $ millions) | ||||||||||

Year | Projected Cash Inflows from Operations | Projected Cash Outflows from Operations | Depreciation Expense | Projected Taxable Income | Projected Federal Income Taxes | Projected State Income Taxes | Projected After-tax Cash Flows | (Present Value) | ||

0 | (191.1) | |||||||||

1 | 850.0 | 840.0 | $ 23.89 | (13.9) | (3.6) | (1.1) | 14.7 | $14.02 | $13.89 | |

2 | 900.0 | 810.0 | $ 23.89 | 66.1 | 17.2 | 5.3 | 67.5 | $125.52 | $123.83 | |

3 | 990.0 | 870.0 | $ 23.89 | 96.1 | 25.0 | 7.7 | 87.3 | $237.71 | $635.64 | |

4 | 1,005.0 | 900.0 | $ 23.89 | 81.1 | 21.1 | 6.5 | 77.4 | $274.41 | $268.40 | |

5 | 1,200.0 | 1,100.0 | $ 23.89 | 76.1 | 19.8 | 6.1 | 74.1 | $320.73 | $312.40 | |

6 | 1,300.0 | 1,150.0 | $ 23.89 | 126.1 | 32.8 | 10.1 | 107.1 | $543.37 | $527.08 | |

7 | 1,350.0 | 1,300.0 | $ 23.89 | 26.1 | 6.8 | 2.1 | 41.1 | $237.77 | $229.72 | |

8 | 1,320.0 | 1,300.0 | $ 23.89 | (3.9) | (1.0) | (0.3) | 21.3 | $137.70 | $132.51 | |

Table 3 – Example – Computing Projected After-tax Cash Flows | ||||||||||

For Year 4 | (all figures in $ millions) | |||||||||

Projected Cash Inflows from Operations | 1005.0 | Projected Cash Inflows from Operations | 1005.0 | |||||||

minus | Projected Cash Outflows from Operations | (900.0) | minus | Projected Cash Outflows from Operations | (900.0) | |||||

minus | Depreciation Expense | (23.9) | minus | Projected Federal Income Taxes | (21.1) | |||||

equals | Projected Taxable Income | 81.1 | equals | Projected State Income Taxes | (6.5) | |||||

Projected After-tax Cash Flows | 77.4 | |||||||||

Projected Taxable Income | 81.1 | |||||||||

times | Corporate income tax rate – Federal | 26.0% | ||||||||

equals | Projected Federal Income Taxes | 21.1 | ||||||||

Projected Taxable Income | 81.1 | |||||||||

times | Corporate income tax rate – State | 8.0% | ||||||||

equals | Projected State Income Taxes | 6.5 | ||||||||

1. Complete Table 2. Compute the projected after tax cash flows for each of years 1-8. | ||||||||||

490.7 | ||||||||||

2. Compute the total present value (PV) of the projected after tax cash flows for years 1-8. | ||||||||||

$380.56 | ||||||||||

3. Compute the net present value (NPV) of the projected after tax cash flows for years 0-8. | ||||||||||

$194.85 | $178.45 | |||||||||

4. Compute the internal rate of return (IRR) of the project. | ||||||||||

26% | ||||||||||

5. The CFO believes that it is possible that the next few years will bring a very low interest rate environment. | ||||||||||

Therefore, she has asked that you repeat the NPV calculation in question 3 showing the case where the | ||||||||||

discount rate for the project is | 5.02% | |||||||||

$194.85 |

Robotics-based equipment proposal

If the Bowie plant is sold, those operations will need to shift to the main Largo facility. The CEO is proposing to acquire robotics-based sorting and distribution equipment to facilitate more cost-effective operations (and be able to handle the increased workload) at Largo.

The CFO has asked you to evaluate the cash flow projections associated with the equipment purchase proposal and recommend whether the purchase should go forward. Table 2 shows projections of the cash inflows and outflows that would occur during the first eight years using the new equipment.

Keep the following in mind:

Depreciation. The equipment will be depreciated using the straight-line method over eight years. The projected salvage value is $0.

Taxes. The CFO estimates that company operations as a whole will be profitable on an ongoing basis. As a result, any accounting loss on this specific project will provide a tax benefit in the year of the loss.

The price is based on these factors:

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