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JWI 530: Financial Management I

Academic Submissions and Evaluations 

Assignment 2: Management Accounting Application 

Due Week 10, Day 7 (Weight: 22.5%)

 

In this assignment you will demonstrate your understanding of capital investment techniques by evaluating the following three case studies. 

Case Analysis 1 – Weight 20% of total assignment 

You work for a small, local telecommunications company. In five years, the company plans to undertake a major upgrade to its servers and other IT infrastructure. Management estimates that it will need up to $450,000 to cover all related costs; however, as a fairly young company, the goal is to pay for the upgrade with cash and not to take out loans.

 

Right now, you have $300,000 in a bank account established for Capital Investments. This account pays 6% interest, compounded annually.

 

A member of the finance department has approached you with an investment opportunity for the $300,000 that covers a five-year period and has the following projected after-tax cash flows:

 

Year

Projected Cash

 

Flow

 

 

1

$94,000

 

 

2

$114,000

 

 

3

$134,000

 

 

4

$114,000

 

 

5

$94,000

 

 

 

Based on this information, answer the following questions:

 

  • How much money will be in the bank account if you leave the $300,000 alone until you need it in five years?
  • If you undertake the investment opportunity, what is the Nominal Payback Period?

 

  • Using the factors for 6%, what is the Discounted Payback Period?
  • What is the Present Value of the benefits from this 5-year investment opportunity?

 

 

  • What is the Net Present Value of this opportunity?

 

 

  • If you leave the money in the bank and earn 6% compounded annually, will you have at least $450,000 in 5 years to fund the server and IT upgrades? By how much will you be “over” or “short” of what you need?

 

©2015 Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University.

 

 

JWMI 530 Course Guide – Spring 2015 !                                                                                        Page 12 of 16

 

JWI 530: Financial Management I

Academic Submissions and Evaluations

 

 

 

 

  • If you undertake the investment, will you have at least $450,000 in 5 years? By how much will you be “over” or “short”?

 

Case Analysis 2 - Weight 30% of total assignment

 

The CEO of Dynamic Manufacturing was at a conference and talked to a supplier about a new piece of equipment for its production process that she believes will produce ongoing cost savings. As the Operations Manager, your CEO has asked for your perspective on whether or not to purchase the machinery.

 

After talking to the supplier and meeting with your Engineers and Financial Analysts, you’ve gathered the following pieces of data:

 

  • Cost of Machine: $150,000
  • Estimated Annual After Tax Savings: $65,000

 

  • Estimated machinery life: 3 years (after which there will be zero value for the equipment and no further cost savings)

 

  • You seem to recall that Dynamic’s Finance organization recommends either a 10% or a 15% discount rate for all Cost Savings Projects. You are fairly sure it is 10%.

 

 

From your JWMI MBA, you understand that you need to understand the project financials to ensure that this investment will be economically attractive to Dynamic Manufacturing’s shareholders.

 

Calculate the Nominal Payback, the Discounted Payback, the Net Present Value and the IRR assuming:

 

  • Part A, BASE CASE: 3 year project life, flat annual savings, 10% discount rate

 

 

 

  • Part B. Saving Growth Scenario: BASE CASE but with 10% compounded annual savings growth in years 2 & 3.

 

  • Part C, Higher Discount Rate Scenario: 3 year project life, flat annual savings, 15% discount rate
  • Part D, 5 Year Equipment Life:5 year project life, flat annual savings, 10% discount rate

 

 

Discussion – in a Word Document in paragraph form, respond to the following:

 

  • From a Financial perspective, would you recommend this purchase to Management? Which scenario would you present and why?

 

  • In your opinion, which scenario is the most aggressive? If you were to select this scenario as the basis for your proposal, how would you justify the more aggressive economics?

 

  • In SIMPLE English (as in talking to a non-Finance and non-MBA person), explain why there was a difference in outcome between Part A and Part B.
  • Beyond Financial measures, what other considerations would you want to consider, before making a recommendation to Management?

 

©2015 Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University.

 

 

JWMI 530 Course Guide – Spring 2015 !                                                                                        Page 13 of 16

JWI 530: Financial Management I

Academic Submissions and Evaluations

 

 

 

 

 

Case Analysis 3 – Weight 40% of total assignment

 

You are the General Manager at the Bicker, Slaughter and Lynch Law Firm. There is an opportunity to buy out a small law firm that was just started by a young MBA/JD and you believe the firm can be grown and become a lucrative part of your Firm.

 

With help from your Finance leader, you have estimated the following benefit streams for this new division:

 

 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

 

 

 

 

 

 

 

 

 

Before Tax

 

 

 

 

 

 

 

 

Cash Flow

 

 

 

 

 

 

 

 

From

 

 

 

 

 

 

 

 

Operations

$(149,000)

$-

$51,380

$88,760

$114,100

$129,780

$143,640

$167,300

 

 

 

 

 

 

 

 

 

After Tax

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

From

 

 

 

 

 

 

 

 

Operations

$(103,500)

$(50,500)

$36,700

$63,400

$81,500

$92,700

$102,600

$119,500

 

 

 

 

 

 

 

 

 

After Tax

 

 

 

 

 

 

 

 

Cash Flow

 

 

 

 

 

 

 

 

From

 

 

 

 

 

 

 

 

Operations

$(85,600)

$15,000

$48,600

$72,200

$95,550

$101,300

$125,200

$140,200

 

 

 

 

 

 

 

 

 

 

 

You estimate that the purchase price for this firm would be $200,000 and that additional net working capital would be needed in the amount of $60,000 in year 0, an additional $20,000 in year 2 and then $20,000 in year 5.

 

 

In addition to the purchase price, you would ask that your Advertising budget of $275,000 be increased by an incremental one time amount of $50,000 in advertising in year 0 to publicize the firm’s expansion.

 

 

Your Finance leader has indicated that the firm has access to a credit line and could borrow the funds at a rate of 6%. (Assume the cash associated with this interest is included in the above benefit numbers). He also mentions that when he runs Project economics for Capital budgeting (such as a new copier or a company car), he recommends a standard 10% rate discount but the one other time they looked at an acquisition of a smaller firm he used a 12% rate discount.

 

 

©2015 Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University.

 

 

JWMI 530 Course Guide – Spring 2015 !                                                                                        Page 14 of 16

JWI 530: Financial Management I

Academic Submissions and Evaluations

 

 

 

 

 

At the end of 8 years, the plan will be to sell this division. The estimated terminal value (the sale and the return of working capital) is conservatively estimated to be $300,000 of cash flow help.

 

 

Calculate the N Nominal Payback, the Discounted Payback, the Net Present Value and the IRR for this potential acquisition.

 

Discussion – in a Word Document in paragraph form, respond to the following:

 

  • From a Financial perspective, would you recommend this purchase to Management? Why?

 

  • What are some of the non-financial elements that would change your initial recommendation made in question #1.
  • Assumptions in Project Economics can have a huge impact on the result. Identify 3 elements/assumptions in your analysis that would make this project not be financially attractive? (E.g. Answer the question, what would have to be true for this to be a bad investment?)

 

 

 

Weight: 22.5%

 

 

Assignment 2: Management Accounting Application

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Criteria

 

Unsatisfactory

 

Low Pass

 

Pass

 

High Pass

Honors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. In Case Analysis

 

Did not

 

Partially

 

Satisfactorily

 

Demonstrated a

Exemplarily

 

 

1, calculate the

 

demonstrate

 

demonstrated

 

demonstrated

 

high level of

demonstrated

 

 

various investment

 

understanding by

 

understanding by

 

understanding by

 

understanding my

understanding by

 

 

options.

 

either not

 

calculating a

 

calculating 5

 

calculating a

calculating all

 

 

Weight: 20%

 

submitting the work

 

minimum of 4

 

questions

 

minimum of 6

seven questions

 

 

 

or only calculating

 

questions

 

correctly.

 

questions

correctly.

 

 

 

 

 

 

 

 

 

 

 

up to 3 questions

 

correctly.

 

 

 

correctly.

 

 

 

 

 

correctly.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2. In Case Analysis

 

Did not submit or

 

Partially analyzed

 

Satisfactorily

 

Completely

Exemplarily

 

 

2, fully evaluate

 

incompletely

 

the investment

 

analyzed the

 

analyzed the

analyzed the

 

 

and support your

 

analyzed the

 

options and

 

investment options

 

investment options

investment options

 

 

conclusions in

 

investment options

 

partially used

 

and satisfactorily

 

and used financial

and exemplarily

 

 

regards to the

 

and did not use

 

financial

 

used financial

 

knowledge and

used financial

 

 

investment options

 

financial knowledge

 

knowledge and

 

knowledge and

 

calculations to

knowledge and

 

 

by calculating the

 

and calculations to

 

calculations to

 

calculations to

 

explain

calculations to

 

 

nominal payback,

 

explain

 

explain

 

explain

 

recommendations.

explain

 

 

the discounted

 

recommendations.

 

recommendations.

 

recommendations.

 

 

recommendations.

 

 

payback, the net

 

 

 

 

 

 

 

 

 

 

 

present value, and

 

 

 

 

 

 

 

 

 

 

 

the IRR and fully

 

 

 

 

 

 

 

 

 

 

 

explain the financial

 

 

 

 

 

 

 

 

 

 

 

rational for your

 

 

 

 

 

 

 

 

 

 

 

recommendations.

 

 

 

 

 

 

 

 

 

 

 

Weight: 30%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

©2015 Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University.

 

 

JWMI 530 Course Guide – Spring 2015 !                                                                                        Page 15 of 16

 

JWI 530: Financial Management I

Academic Submissions and Evaluations

 

 

 

 

Weight: 22.5%

 

 

Assignment 2: Management Accounting Application

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Criteria

 

Unsatisfactory

 

Low Pass

 

Pass

 

High Pass

Honors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3. In Case Analysis

 

Did not submit or

 

Partially analyzed

 

Satisfactorily

 

Completely

Exemplarily

 

 

3, fully evaluate the

 

incompletely

 

the acquisition

 

analyzed the

 

analyzed the

analyzed the

 

 

buy out opportunity

 

analyzed the

 

opportunity and

 

acquisition

 

acquisition

acquisition

 

 

and support your

 

acquisition

 

partially used

 

opportunity and

 

opportunity and

opportunity and

 

 

conclusions by

 

opportunity and

 

financial

 

satisfactorily used

 

used financial

exemplarily used

 

 

calculating the

 

incompletely used

 

knowledge and

 

financial

 

knowledge and

financial knowledge

 

 

nominal payback,

 

financial knowledge

 

calculations to

 

knowledge and

 

calculations to

and calculations to

 

 

the discounted

 

and calculations to

 

explain

 

calculations to

 

explain

explain

 

 

payback, the net

 

explain

 

recommendations.

 

explain

 

recommendations.

recommendations.

 

 

present value, and

 

recommendations.

 

 

 

recommendations.

 

 

 

 

 

the IRR for the

 

 

 

 

 

 

 

 

 

 

 

potential acquisition

 

 

 

 

 

 

 

 

 

 

 

and fully explain the

 

 

 

 

 

 

 

 

 

 

 

financial rational for

 

 

 

 

 

 

 

 

 

 

 

your

 

 

 

 

 

 

 

 

 

 

 

recommendations.

 

 

 

 

 

 

 

 

 

 

 

Weight: 40%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5. Professionally

 

Written

 

Written

 

Written

 

Written

Written

 

 

communicated;

 

communication

 

communication

 

communication

 

communication

communication

 

 

writing is clear,

 

does not flow and

 

does not flow or

 

flows but lacks

 

flows and

flows and concisely

 

 

concise, and free

 

fail to justify or

 

the discussion

 

conciseness or

 

concisely and

and clearly

 

 

from mechanical

 

express student

 

fails to justify

 

clarity; assertions

 

clearly expresses

expresses the

 

 

errors.

 

assertions. Multiple

 

conclusions and

 

and conclusions

 

the student’s

student’s position

 

 

Weight: 10%

 

mechanical errors

 

assertions.

 

are generally

 

position in a

in an exemplary

 

 

 

or much of the

 

Several

 

justified and

 

manner that

manner that

 

 

 

 

 

 

 

 

 

 

 

communication is

 

mechanical errors

 

explained. More

 

rationally and

rationally and

 

 

 

 

difficult to

 

make parts of the

 

than a few

 

logically develops

logically develops

 

 

 

 

understand.

 

text difficult to

 

mechanics errors.

 

the topics. Few

the topics. Free

 

 

 

 

 

 

understand.

 

 

 

mechanical errors.

from mechanical

 

 

 

 

 

 

 

 

 

 

 

errors.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

©2015 Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University.

 

 

JWMI 530 Course Guide – Spring 2015 !                                                                                        Page 16 of 16


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    Submitted by PROFSTAN on June 13th, 2016 12:29

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