math
Runninghead:
Business writing 2
Business writing 2
Assignment #1
“Party Sea” would like to start a new line of business and spend
$
40,000,000 to buy luxury sailing catamarans for its many worldwide locations that would be available for rent. A few months ago it spent $50,000 on in-house consulting team to perform research of spending habits of the company’s typical customers across its worldwide locations. A few weeks ago, it also paid $400,000 to buy software that forecasts future trends in customers expenditures based on past business data of the company.
If “Party Sea” does decide to make the multi-million dollar investment, it will need to immediately sell a large number of sail boats that has been its main rental income generator for the past decades. In particular, it currently owns 20 sail boats that were purchased brand-new 10 years ago for a total of $20,000,000. It also owns another 20 newer sail boats that were purchased brand-new 30 years ago for a total of $16,000,000. All of these can now be sold in bulk for a quarter of the original price. The sail boats have been losing their value at a constant annual rate over their 20-year economic life.
“Party Sea” ‘s business puts it into a 28% tax rate for all taxable income amounts.
If “Party Sea” decides to launch the multi-million dollar sailing catamaran project, how much would it need to consider for the Net Capital Spending in
Year 0
of this project?
First, based on the above information, is there any cash flow or cash flows that “Party Sea” should ignore when making the sailing catamaran investment decision? Put the dollar amount of it here: ( )$.
Type 0 if none. Type the total dollar amount if it’s non-zero, but do not type the “$” sign.
What is the total remaining book value of the sail boats, as of today? ( )$. Type the total dollar amount but do not type the “$” sign.
If “Party Sea” decides to go ahead with the sailing catamaran project and the sail boats get sold today, how much will “Party Sea” be able to collect after taxes from selling the sail boats, i.e., the after-tax salvage value (ATSV)? (. )$. Type the total dollar amount but do not type the “$” sign.
The Net Capital Spending in Year 0 should include the following. Refer to the table below. In the second column, type YES if that cash flow should be directly added to $40,000,000 (as either money spent or money received), and type NO if it should not be.
|
Money paid to internal consultants (money spent) |
|
Money paid for the business forecast software (money spent) |
|
Money spent in the past on buying the older sail boats (money spent) |
|
Money spent in the past on buying the newer sail boats (money spent) |
|
Selling price of the sail boats if they’re sold today (money received) |
|
ATSV of the sailboats if they’re sold today (money received) |
The numerical answer of your calculated Net Capital Spending in Year 0 is $.( ) Round to whole dollar. Do not use the “$” sign.
2. “Party Sea” is considering buying sailing catamarans for $33,000,000. The catamarans will be losing value over their life, resulting in a 25% annual drop in the after-tax sale proceeds. (In other words, if the catamarans are sold in one year, the company will get 25% less after taxes compared to their original purchase price. If they are sold in two years, the company will get 25% less after taxes compared to what it would get if it sold them in one year. And so on.) Each year, the company will be making money by renting the catamarans out. The estimated operating cash flow in the first year is $8,000,000, and this will be increasing by 12% each year.
Other companies in the same line of business typically generate a 15% return.
Answer the following questions. All dollar amounts should be rounded to whole dollar. Do not use the “$” signs. Type 0 for any blank values. Increase decimal places for all intermediate calculations to 6 or even higher. Type the MINUS SIGN for all dollar amounts that are cash outflows.
(a) Right now, the company is planning to use these catamarans for a total of 5 years, after which they will be sold. It is hoping that this business idea will be a success! 😀 Fill out all values in the table below for this successful scenario!
| Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|||||||||||||||||||||||||||||||||
|
OCF |
$ | |||||||||||||||||||||||||||||||||||||
|
NCS |
In this case, the Net Present Value of this project equals ( )$.
(b) There is a 10% chance of a different scenario: the business won’t be going as well. 😭 In this unfortunate case, the operating cash flow in the first year will be only half of the original estimate (see above). (It will still be increasing each year as explained above.) Fill out all values in the table below for this case!
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
OCF
$
$
$
$
$
$
NCS
$
$
$
$
$
$
In this case, the Net Present Value of this project equals ()$.
Also, taking the original possible scenario into account, the Expected Net Present Value of this project equals ()$.
(c) Let’s continue part (b)! “Party Sea” is now considering the following: if the business doesn’t go as well, it might make sense to shut the catamaran project down sooner, at the end of year 4 rather than at the end of year 5! 😥Fill out all values in the table below for this adjusted scenario!
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
OCF
$
$
$
$
$
$
NCS
$
$
$
$
$
$
In this case, the Net Present Value of this project equals $.()
Also, taking the original possible scenario into account, the Expected Net Present Value of this project equals $()
So, is it worth it to “Party Sea” to shut the catamaran business down sooner than originally planned? Type yes or no. The dollar value of this option to shut the business down sooner is $.()
3. “Party Sea” is considering buying sailing catamarans for $30,000,000. The catamarans will have an economic life of 15 years and will depreciate at a constant rate each year of their life. The company is planning to rent out these catamarans for a total of 5 years, after which they will be sold for a market price of $20,000,000. The estimated annual after-tax profits are summarized in the table below. “Party Sea” faces a 28% tax rate. Other companies in the same line of business typically generate a 9% return.
Answer the following questions. All dollar amounts should be rounded to whole dollar, and do not use the “$” signs.
(a) Fill out the missing value in the table below!
|
Pay $30,000,000 for the catamarans |
Profit = $ 5,500,000 |
Profit = $5,000,000 |
Profit = $4,500,000 |
Profit = $4,000,000 |
Profit = $3,500,000 |
|
|
After-tax salvage value = $ |
The estimated Net Present Value equals $()
(b) “Party Sea” would like to address some uncertainty that it has regarding some of the estimated values for the future years of this catamaran project. In particular, there is a chance that the business goes really poorly, in which case in each year the annual profit will be 10% lower. This, however, implies that the catamarans will be used a lot less heavily. And so their future market price at the time of sale is likely to be 30% higher. Overall, what will be the effect on the profitability of this project?? 😕
First, for this scenario, fill out the missing values in the table below!
| Profit = $ |
The recalculated estimated Net Present Value equals ( )$
The new numbers imply that under this scenario the Net Present Value will go _____ (type up or down) by %( ) (round to TWO decimal places, e.g., type 12.34 for 12.34%, and do not use the “%” sign).
4, “Party Sea” is considering a new business idea: buying and then renting out sailing catamarans to rich customers. The company estimates that it will cost $26,000,000 to buy brand-new sailing catamarans. The estimated operating cash flow will equal $6,000,000 per year. At the end of Year 3 this catamaran project will be over, at which time all used catamarans will be sold at the after-tax salvage value of $12,000,000. The company also plans to immediately set aside $60,000 in cash which will be recovered at the end of the project.
Calculate the Net Present Value of the project if the appropriate discount rate is 8%. (________?) Increase decimal places for any
intermediate calculations, from the default 2 to 6 or higher. Only round your final answer to whole dollar: for example, 10,000. Do NOT use “$” in your answer.