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    Business Related Decision Making

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    Please provide some guidance & assistance with these finance problems.

    1. Your company currently sells Blue Jeans. The Board of Directors wants you to look at replacing them with a line of Synthetic Denim Jeans. Briefly explain whether the following are relevant cash flows to this analysis and if so, how those cash flows can affects any decision.
    a. $300,000 drop in sales from terminating the regular Blue Jeans
    b. $750,000 in land you own that may be used for the project
    c. $200,000 spent on Research and Development last year on Blue Jeans
    d. $350,000 you will pay to Fred Singles to promote your new synthetic Jeans
    e. $125,000 you will receive by selling the existing production equipment which must be replaced

    2. Mohegan Productions is considering acquisition of a new press machine for their manufacturing facility in Pennsylvania. They have two machines from which to select. Alternative A has a cost of $120,000. The net cash flow benefit in terms of added efficiency from Alternative A amount to $65,000 per year for 3 years. Empire is also considering Alternative B, which will cost $170,000. Once in operation, they project that it will produce benefits of $70,000 per year for 4 years. Inflation is expected to be zero during the next 4 years. If cash inflows occur at the end of each year, and if the cost of capital is 12%, which of the two alternatives will add the most value? Calculations to show results would help my understanding.

    3. A&T Trucking Company is evaluating a potential lease agreement on a truck that costs $40,000 and falls into the MACRS 3-year class. The loan rate would be 10 percent and would be amortized over the 4-year period, if Werner decided to borrow money and buy the asset rather than lease it. The loan payments would be made at the end of the year. The truck has a 4-year economic life, and its estimated residual value is $10,000. If Werner buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment at the beginning of each year. A&T's tax rate is 40 percent. Should the firm lease or buy? What is the NAL? The depreciation rates for 3-year assets are 33% for the first year, 45% for the second year, 15% for the third year and 7% for the fourth year.

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    Solution Preview

    Please see attachment.

    1. Your company currently sells Blue Jeans. The Board of Directors wants you to look at replacing them with a line of Synthetic Denim Jeans. Briefly explain whether the following are relevant cash flows to this analysis and if so, how those cash flows can affect any decision.
    a. $300,000 drop in sales from terminating the regular Blue Jeans

    A cash flow is relevant only if it affects the decision choice been evaluated. Since the drop, in sales, will affect the whole company it is therefore relevant. The cash flow will potentially reduce the total profitability of the whole decision.

    b. $750,000 in land you own that may be used for the project

    The value, of the land, is not relevant to the decision choice. This is because the land has already been acquired and the decision to select it would not mean any extra cost to the firm.

    c. $200,000 spent on Research and Development last year on Blue Jeans

    The R & D is not a relevant cost. A relevant cost must cover the future and not the past. Since the cost has been incurred last year it is no longer relevant.

    d. $350,000 you will pay to Fred Singles to promote your new synthetic Jeans

    The promotion cost is a future cost which will be ...

    Solution Summary

    The solution discusses business related decision making for the given finance problems.

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