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Assignment 1
Problem # 1:
Cash and Short Term Investments 946.9 996.7 Accounts payable 1,856.9 1,957.1
Taxes 263.5
Dividends 668.6
1
a. What is the operating cash flow for the Current Year?
OCF = EBIT + Dep’n – Taxes = 1,104.9 + 442 - 263.5 = 1,283.4
b. What is the amount of the net capital spending for the Current Year?
NCS = Ending FA – Beginning FA + Dep’n = 6,665.1 – 6,295.5 + 442 = 811.6
c. What is the change in the net working capital from the Previous Year to the
Current Year?
Change NWC = Ending NWC – Beginning NWC = (8,637.7 – 4,680.9) – (8,692.3 –
3,883.8) = 3,956.8 – 4,808.5 = -851.7
d. What is the cash flow from assets for the Current Year?
CFFA = OCF – NCS – Change NWC = 1,283.4 – 811.6 – (-851.7) = 1,323.5
e. What is the cash flow to creditors for the Current Year?
CF to Creditors = Interest Paid – Net new borrowings = 93.9 – (4,884.6 – 5,314.3) =
523.6
f. What is the cash flow to stockholders for the Current Year?
CF to Stockholders = Dividends paid – Net new equity raised = 668.6 – (1,486.4 –
1,617.7) = 799.9
g. What is Canadian Tire Corporation’s tax rate?
Tax rate = 263.5/1,011 = 26.06%
h. In no more than 3 sentences, what are your thoughts on Canadian Tire
Corporation’s changes in net working capital?
The negative change in NWC means that Canadian Tire ending NWC was lower than the
beginning NWC. Since current assets remained largely the same between 2015 & 2016
the increase in current liabilities is the main reason for the decrease.
2
Problem # 2:
Year 0 1 2 3 4 5 6
Sales Volume 10,000 12,500 15,750 20,000 25,250 30,500
Price 30 30 30 25 25 25
VC per unit 18 18 18 15 15 15
Revenue (sales volume*price) 300000 375000 472500 500000 631250 762500
VC (sales volume*VC per unit) 180000 225000 283500 300000 378750 457500
Depreciation 550,000/6
Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6
Investment -590,000
Revenue 300,000 375,000 472,500 500,000 631,250 762,500
VC 180,000 225,000 283,500 300,000 378,750 457,500
FC 50,000 50,000 50,000 50,000 50,000 50,000
Depreciation 91,666.67 91,666.67 91,666.67 91,666.67 91,666.67 91,666.67
EBIT (21,666.67) 8,333.33 47,333.33 58,333.33 110,833.33 163,333.33
Taxes (7,366.67) 2,833.33 16,093.33 19,833.33 37,683.33 55,533.33
EBIT (1-T) (14,300.00) 5,500.00 31,240.00 38,500.00 73,150.00 107,800.00
Depreciation 91,666.67 91,666.67 91,666.67 91,666.67 91,666.67 91,666.67
OCF 77,366.67 97,166.67 122,906.67 130,166.67 164,816.67 199,466.67
Change in NWC -25,000 (3,750) (4,875) (1,375) (6,563) (6,563) (48,125)
Total CF 73,616.67 92,291.67 121,531.67 123,604.17 158,254.17 247,591.67
NPV = -590,000+((73,616.67/(1.09)+((92,291.67/(1.09)^2)+((121,531.67/(1.09)^3)+((123,604.17/(1.09)^4)+((158,254.17/(1.09)^5)+((247,591.67/(1.09)^6)
NPV = 686,139
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Problem # 3:
a) What is the depreciation tax shield in the third year of this project
Beg UCC CCA 30% End UCC
Yr 1 (Half-year rule (300,000/2) 150,000 45,000 105,000
Yr 2 255,000 76,500 178,500
Yr 3 178,500 53,550 124,950
c) What is the minimum price that your company should bid per single flag?
Year 0 1 2 3 4 5
Initial Cost -300,000
Initial NWC -50,000
Recovery of NWC 50,000
Annual CF
Sales 150,000P 150,000P 150,000P 150,000P 150,000P
VC (8*150,000) 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
FC 100,000 100,000 100,000 100,000 100,000
Total Cost 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000
Salvage value 60,000
NWC Recovered 50,000
Calculations:
PV of Initial Cost -300,000
PV of Initial NWC -50,000
PV of Annual CF (150,000P -1,300,000) * (1-0.4) * 3.352 (150,000P-1,300,000)*(1-0.4)*((1-(1/((1.15)^5))/0.15)
PV of Salvage Value 29,830.60 ((60,000/(1.15)^5))
PV of NWC Recovered 24,858.84 ((50,000/(1015)^5))
PVCCATS 66,773.78 calculation the same as in b)
NPV 0
Solve for P -300,000 - 50,000 + (150,000P - 1,300,000) * (1-0.4)*3.352 + 29,830.60 + 24,858.84 + 66,773.78 = 0
(150,000P - 1,300,000)*2.0112 = 300,000 + 50,000 - 29,830.60 - 24,858.84 - 66,773.78
(150,000P - 1,300,000) = (228,536.78/2.0112)
150,000P = 113,632.05 + 1,300,000
P=9.42
NPV 22,863.22
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Problem # 4:
System A System B
Initial Cost 8,500 Initial Cost 9,200
Expected Life 3 yrs Expected Life 4 yrs
Pre-tax operating cost 550 Pre-tax operating cost 525
Salvage Value 900 Salvage Value 975
Problem # 5:
SP 95%*30 30 105%*30
VC 97%*20 20 103%*20
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b) What is the base case NPV for the project?
NPVbase = -100,000+86,300*((1-(1/((1+0.12)^2)/0.12) = 45,851.40
c) What is the worst case NPV for the project?
OCFworst = [(28.5-20.6)*13,500 – 45,450)](1-0.34) + (100,000/2)*0.34 = 57,392
NPVworst = -100,000+57,392*((1-(1/(1+0.12)^2)/0.12) = 3,004.59
d) What is the best case NPV for the project?
OCFbest = [(31.5-19.4)*16,500 – 45,450](1-0.34) + (100,00/2)*0.34 = 118,772
NPVbest = -100,000+118,772*((1-(1/(1+0.12)^2)/0.12) = 100,730.74
e) Suppose you want to conduct a sensitivity analysis for the possible changes in unit
sales. What is the IRR when the sales level equals 13,500 units?
OCFunit = [(30-20)*13,500 – 45,000](1-0.34) + (100,000/2)*0.34 = 76,400
Excel IRR formula
Year Cash Flows
0 -100,000
1 76,400
2 76,400
IRR 33.59%
f) Suppose you are interested in the project's sensitivity to unit price. What is the NPV
at a price of $29.00 per unit?
OCFprice = [(29-20)*15,000 – 45,000](1-0.34) + (100,000/2)*0.34 = 76,400
NPVprice = -100,000+76,400*((1-(1/(1+0.12)^2) = 29,119.90
g) What is the base case accounting break-even point?
Qa = (FC + D)/ (P-v)
Qa = (45,000 + 50,000)/(30-20) = 9,500
h) What is the base case cash break-even point?
Qc = FC/(p-v)
Qc = 45,000/(30-20) = 4,500
i) What is the base case financial break-even point? Ignore taxes
Qf = (FC + OCF*)/(P-v)
NPV = 0 implies 100,000 = OCF*(PVIFA 12%,2)
OCF* = 100,000*((1-(1/(1+0.12)^2)/0.12 = 59,169.81
Qf = 45,000+59,169.81/(30-20) = 10,416.98
j) What is the degree of operating leverage under the base-case scenario?
DOL = 1+FC/OCF
DOL = 1+(45,000/86,300) = 1.52
6
Problem # 6:
E = 125,000(62) = 7,750,000
D = 5,500,000(97) = 5,335,000
P = 16,380(99) = 1,621,620
Problem # 7: