ERAU South Sea Baubles Financial Statements Questions Response Financial Statements. South Sea Baubles has the following (incomplete) balance sheet and inc

ERAU South Sea Baubles Financial Statements Questions Response Financial Statements. South Sea Baubles has the following (incomplete) balance sheet and income statement. Please answer all questions. Please show work clearly to get full credit.
1. Financial Statements. South Sea Baubles has the following (incomplete) balance sheet and
income statement.
Assets
Current assets
Net fixed assets
BALANCE SHEET, AS OF END OF YEAR
(Figures in millions of dollars)
2010
2011
Liabilities and
Shareholder’s Equity
$ 90
$ 140
Current liabilities
$ 800
$ 900
Long-term debt
2010
2011
$ 50
$ 600
$ 60
$ 750
INCOME STATEMENT, 2011
(Figures in millions of dollars)
Revenue
$ 1,950
Cost of goods sold
$ 1,030
Depreciation
$ 350
Interest expense
$ 240
a. What is shareholders’ equity in 2010 and 2011?
b. What is net working capital in 2010 and 2011?
c. What are taxable income and taxes paid in 2011? Assume the firm pays taxes equal to
35% of taxable income.
d. What is cash provided by operations during 2011? Pay attention to changes in net
working capital.
2. AG&M Cutting Tools Company purchased a new abrasive jet-cutting machine in 2012 at a
cost of $180,000. The company also paid $5,000to have the equipment delivered and
installed. The cutting machine has an estimated useful life of 12 years, but it will be
depreciated by MACRS over its seven-year class life.
a. What is the cost basis of the cutting equipment?
b. What will be the depreciation allowance in each year of the seven-year class life for the
cutting machine?
3. On October 3, Kim Bailey paid $250,000 for a residential rental property. This purchase
price represents $200,000 for the building and $50,000 for the land. Five years later, on June
25, she sold the property for $250,000. Compute the MACRS depreciation for each of the
five calendar years during which she had the property.
4. USA Aluminum Company is considering making a major investment of $150 million ($5
million for land, $45 million for buildings, and $100 million for manufacturing equipment
and facilities) to produce a stronger, lighter material, called aluminum lithium, that will make
aircraft sturdier and more fuel efficient. Aluminum lithium has been sold commercially as an
alternative to composite materials for only a few years. It will likely be the material of choice
for the next generation of commercial and military aircraft because it is so much lighter than
conventional aluminum alloys. Another advantage of aluminum lithium is that it is cheaper
than composites. The firm predicts that aluminum lithium will account for about 5% of the
structural weight of the average commercial aircraft within 5 years and 10% within 10 years.
The proposed plant, which has an estimated service life of 12 years, would have a production
capacity of about 10 million pounds of aluminum lithium, although domestic consumption of
the material is expected to be only 3 million pounds during the first four years, five million
for the next three years, and eight million for the remaining plant life. Aluminum lithium
costs $15 a pound to produce, and the firm would expect to sell it at $28 a pound. The
building, which will be placed in service on July 1 of the first year, will be depreciated
according to the 39-year MACRS real-property class. All manufacturing equipment and
facilities will be classified as seven-year MACRS property. At the end of project life, the
land will be worth $8 million, the building $30 million, and the equipment $10 million. The
firm’s marginal tax rate is 40%, and its capital gains tax rate is 35%.
a. Determine the net after-tax cash flows.
b. Determine the IRR for this investment.
c. Determine whether the project is acceptable if the firm’s MARR is 15%.
5. Consider the following six alternatives. They have 20-year useful lives and no salvage value.
If the minimum attractive rate of return is 6%, which alternative should be selected?
Cost
PW of benefit

=

A
$ 4,000
$ 7,330
1.83
B
C
$ 2,000 $ 6,000
$4,700 $ 8,730
2.35
1.46
D
$ 1,000
$1, 340
E
$ 9,000
$9,000
F
$ 10,000
$ 9, 500
1.34
1.00
0.95

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