Share
Explore BrainMass

Cranberry Corporation: Projected net income

See attached file for proper format.

Cranberry Corporation
Income Statement
($ in millions)

Sales $300
Costs 250
EBT $ 50
Taxes (34%) 17
Net income $ 33
Retained earnings $ 22
Dividends $ 11

Cranberry Corporation
Balance Sheet
($ in millions)

Cash $5 Accounts payable $ 40
Accounts receivables 40 Notes payable 30
Inventory 65 Current liabilities $ 70
Current assets $110 Long-term debt 155
Net plant & equip. 290 Common stock 75
Retained earnings 100
Total assets $400 Total liab. & equity $400

REQUIRED:

a. Assuming a constant profit margin, what will Cranberry Corporation's net income be if sales increase by 10%?

b. What is Cranberry Corporation's addition to retained earnings with a 10% increase in sales? Assume the dividend payout ratio and profit margin remain fixed.

c. Assume Cranberry Corporation is operating at full capacity and must maintain the same level of capital intensity. What will total assets be if sales increase by 10%? Assume costs, current liabilities, and current assets vary directly with sales and that the dividend payout ratio remains unchanged.

d. Assume Cranberry Corporation is using its fixed assets at 90% capacity and must maintain the same level of capital intensity. Assume costs, current liabilities, and current assets vary directly with sales, and that the dividend payout ratio remains unchanged. If sales increase by 20%, what will total fixed assets be?

e. How much external financing is needed for a 20% increase in sales if the Corporation is currently operating at full capacity? Assume assets and costs vary directly with sales but no current liabilities increase with sales and that the dividend payout ratio remains fixed.

Question 2

A project requires an initial fixed asset investment of $600,000, which will be depreciated straight-line to zero over the six-year life of the project.

The pre-tax salvage value of the fixed assets at the end of the project is estimated to be $50,000.

Projected sales volume for each year of the project is shown below.

The sale price is $50 per unit for the first three years, and $45 per unit for years 4 through 6.

A $30,000 initial investment in net working capital (NWC) is required, with additional investments equal to 7.5% of annual sales for each year of the project. The previous year's NWC investment, including the initial $30,000, is recovered at the end of each year. So, at the end of year 1, the firm recovers the $30,000 initial investment and invests a new NWC investment equal to 7.5% of year 1 sales. At the end of year 6, no NWC investment is needed as the project is completed.

Variable costs are $35 per unit, and fixed costs are $50,000 per year.

The firm has a tax rate of 34% and a required return on investment of 12%.

Year 1 2 3 4 5 6
Sales 10,000 12,500 15,625 19,531 24,414 30,518

Question that need detailed math anaswers:

a. What is the amount of net additions to (recoveries of) NWC during year 4 of the project?

b.What is the operating cash flow during year 5 of the project?

c. What is the NPV of the project? (Suggest using Excel for this one.)

d. What would be the present value of the depreciation tax shield(s), if, instead of using straight-line depreciation, the asset was depreciated using CCA rules, assuming it fell into a 20% CCA class? (No need to re-calculate Net Present Value.)

Attachments

Solution Summary

Cranberry Corporations projected net income is examined.

$2.19