Finance Questions: Income Statements, Salaries, Investments, and Internal Rates of Return

16. Congratulations! You just finished a successful year (YEAR NUMBER 2) as Chief Financial Officer of "Body Fumigation Development" (BFD) and animal extermination facility.

The CEO just asked you for a quick, summarized copy of the financial statements. Of course you say, no problem boss, it will only take me a few minutes----NOT!! However, like a good employee, you tell him you will produce this summary for him as soon as possible.

a) Construct an Income Statement
Your current year figures are as follows: Revenues, $150,000; Expenses, $41,000; Depreciation Expense, oops?you still have to figure that out. Two pieces of equipment have been purchased?1 piece in year 1 for $50,000 that has a 5 year life with no salvage value, 1 piece in year 2 for $450,000 that has a 25 year life with no salvage value. You realize that your boss needs this info quickly, so you are just going to figure out the depreciation expense for the current year (year 2). You will use the straight line method. Your tax rate is estimated at 34%.

b) Construct a Balance Sheet

You have current balances as follows: Accounts Payable, $15,000; Accounts Receivable, $45,000; Cash, $15,000; Wages Payable, $25,000; And of course your equipment as stated in the preceding paragraph. You do have some stockholder's equity (hint: in this section you will have two line items-- 1) retained earnings, for which you need to figure out on your own; and 2) paid in capital?current year paid in capital balance is $540,500). (Another hint: you can have a retained loss -- in other words, your balance sheet retained earnings line could be a negative figure).

17. An investment is expected to generate $2,000,000 each year for four years. If the firm's cost of funds is 5%, what is the maximum amount the firm should pay for the investment?

18. You are offered two jobs. One initially pays $100,000 annually, and your salary will grow annually at 11.5%. The other pays pays $97,000 annually, but your salary will grow at 12%. After ten years, which job pays the higher salary?

19. A firm has the following investment alternatives:
Cash Inflows
Year A B C
1 $500 $0 $0
2 500 400 0
3 500 800 0
4 600 900 1,900

Which investment should be considered? Show work for partial credit. Use a 10.5% discount rate. Hint: A discount rate gives you the clue that you should perform a present value analysis on each investment.

20. Your firm is contemplating the purchase of a new $850,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $180,000 at the end of that time. You will save $310,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $75,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. If the tax rate is 35 percent, what is the IRR for this project?