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# Cash Flow analysis

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Dunder-Mifflin, Inc is analyzing the potential profitability of three printing jobs put up for bid by the State Department of Revenue:

1. the company's marginal city plus state plus federal tax rate is 50%
2. each job is expected to have a 6 yr. life
3. firm uses straight line depreciation
4. the average cost of capital is 14%
5. the jobs have the same risk as the firms other business
6. the company has already spent \$60,000 on developing preceding data.

This \$60,000 has been capitalized and will be amortized over the life of the project

A. What is the expected bet cash flow each year
B. What is the net present value of each project? On which project if any, should the company bid?
C. Calculate the profitability index

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## How do you calculate a cash flow statement, financial statement and a break-even point analysis?

Statement of Cash Flows
Southwestern Rentals, Inc., rents equipment to customers ranging from homeowners to large construction companies. The financial information shown below was gathered from its accounting records for 2006. Assume any increase or decrease in the balances from 1/1/06 to 12/31/06 resulted from either receiving or paying cash in the transaction. For example, during 2006 the balance on loans for land holdings increased \$150,000 because the company received \$150,000 in cash by taking out an additional loan on the land.
Balance as of Balance as of
Items 1/1/06 12/31/06
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 20,000 \$ 50,000
Cash receipts from customers . . . . . . . . . . . . . . . . . . . . ? 600,000
Loans on land holdings . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 250,000
Cash distributions to owners . . . . . . . . . . . . . . . . . . . . . ? 150,000
Loan on building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 70,000
Investments in securities . . . . . . . . . . . . . . . . . . . . . . . . 850,000 1,050,000
Cash payments for other expenses . . . . . . . . . . . . . . . . ? 50,000
Cash payments for taxes . . . . . . . . . . . . . . . . . . . . . . . . ? 55,000
Cash payments for operating expenses . . . . . . . . . . . . . ? 135,000
Cash payments for wages and salaries . . . . . . . . . . . . . ? 100,000
Required:
1. Prepare a statement of cash flows for Southwestern Rentals, Inc., for the year ended December 31, 2006.
2. Does Southwestern Rentals, Inc. appear to be in good shape from a cash flow standpoint? What other information would help you analyze the situation?

Financial Statements. As you can see, someone has spilled ink over some of the entries in the balance sheet and income statement of Transylvania Railroad. Can you use the following information to work out the missing entries:

long-term debt ratio 0.4
times interest earned 8.0
current ratio 1.4
quick ratio 1.0
cash ratio 0.2
ROA 18%
ROE 41%
inventory turnover 5.0
average collection period 71.2 days

INCOME STATEMENT (in millions)
net sales ???
cost of goods sold ???
SGA expenses 10
depreciation 20
EBIT ???
interest expense ???
EBT ???
Tax ???
net income???

BALANCE SHEET (in millions)
assets this year last year
cash & marketable securities ??? 20
receivables ??? 34
inventories ??? 26
total current assets ??? 80
net property, plant, & equipment ??? 25
Total assets ??? 105
liabilities & shareholders equity
accounts payable 25 20
notes payable 30 35
total current liabilities ??? 55
long-term debt ??? 20
shareholders equity ??? 30
Total liabilities & shareholders 115 105

Break-Even Analysis
Jane Tamlyn paid \$225 to rent a carnival booth for four days. She has to decide whether to sell doughnuts or popcorn. Doughnuts cost \$1.80 per dozen and can be sold for \$3.60 per dozen. Popcorn will require a \$113 rental fee for the popcorn maker and \$0.08 per bag of popcorn for the popcorn, butter, salt, and bags; a bag of popcorn could sell for \$0.45.

Required:
1.Compute the break-even point in dozens of doughnuts if Jane decides to sell doughnuts exclusively and the break-even point in bags of popcorn if she decides to sell popcorn exclusively.
2.Jane estimates that she can sell either 75 doughnuts or 45 bags of popcorn every hour the carnival is open (10 hours a day for four days). Which product should she sell?
3.Jane can sell back to the baker at half cost any doughnuts she fails to sell at the carnival. Unused popcorn must be thrown away. If Jane sells only 70% of her original estimate, which product should she sell? (Assume that she bought or produced just enough to satisfy the demands she originally estimated.)

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