Chapter 18
Long term forsight for company, usually developed by top management
Vision and mission of strategic plan
Which discount rate will produce the smallest present value?
a. 2%
b. 6%
c. 8%
d. Not possible to determine without cash flows
c. The higher the discount rate, the lower the present value
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Nordstrom's is an example of which type of company strategy
Product differentiation
Leigh is evaluating two different investments. The total net cash flows and payback period are the same for both projects. Leigh's management can conclude that:
a. One project may have a positive net present value while the other's may be negative.
b. The two investments will have the same NPV.
c. The two projects are equally desirable.
d. The two investments require the same initial investment.
a. The NPVs may be very different. The NPV depends on the timing of the cash flows.
STRIKE
Boeing
Name the elements of the balanced scorecard
Financial
Customer
Internal business processes
Learning and growth
A project has a profitabiltiy index of 1.38. The project's present value of future cash flows is $23,250. The company has a discount rate of 12%. What was the initial investment?
$16,248
Index = PV of future cash flows/initial investment
$23,250/X = 1.38
X = $16,248
Event occurred Wednesday, 9/18 affecting US Economy
Discount rate reduced
What are the elements of the SWOT analysis and describe when it is used
Strengths, weaknesses, opportunities, threats
Used during strategid planning
Collum is considering trading in an old machine and purchasing a new one for $248,600. Data related to the investment is:
Cash flows:
Year 1 $139,000, Year 2 $143,000, Year 3 $131,000 Year 4: $136,000
Salvage values: Old equipment: $24,500, New equipment $27,500
Initial investment in working capital: $15,000
What is the payback for the new machine?
1.7 years
Investment: Machine $248,600 + working capital $15,000 = $(263,600 total) cash out
Year 0: Salvage old machine $24,500
Year 1: Cash flow $139,000
Balance end of year 1: (100,100)
/ proceeds year 2 $143,000
= Portion of year 2 .7
1.7 years
Tarriffs on Chinese goods imported to US
Trump will increase if elected
Name Porter's 5 forces
Identify the company's environment:
- Rivals
- Power of customers
- Threat of substitutes
- Threat of new entrants
- Bargaining power of suppliers
Super Industries is considering investing in a machine with a 5 year life with the following characteristics:
Initial investment: $500,000
Additional investment in working capital $10,000
Cash flows before taxes years 1 to 5: $140,000
Yearly depreciation: $90,000
Tax rate: 30%
What is the after tax cash flow in year 2?
$125,000
Before tax cash flow $140,000
Depreciation expense (90,000)
Operating income (GAAP) $50,000
Tax expense @ 30% (15,000)
After tax income GAAP $35,000
Add back depreciation 90.000
After tax cash flow $125,000
or use depreciation shield method:
Before tax cash flow $140,000
Tax expense on cash (42,000)
Cash flow before dep shield $98,000 (1)
Depreciation shield:
Depreciation expense $90.000
* tax rate @ 30% 27,000 (2)
Equals cash flow after tax $125,000 (1)+(2)
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