25 May Question Problem #1 (16) Problem #1 (16)
Question
Problem #1 (16)
Problem #1 (16)
The ABC corporation is interested in purchasing a small manufacturing firm (making car seats). An initial Investment of $15 million is required. Let us assume that the sale price of the car seat is normally distributed with a mean of $65, and standard deviation of $4.00 per unit. Also we assume that the sales volume is governed by the following empirical distribution
Yearly Sales Volume (in 1000) Probability
————————————— ———————-
90 – 120 0.25
120 — 150 0.47
150 – 180 0.28
The cost (of production) is uniformly distributed between $20-$50. We want to accurately estimate the yearly net cash flow assuming a corporate (composite )tax rate (T) which is 45% now but there is a 60% Probability that it will jump to 55% starting next year. Use the following notations and equations to the questions asked (See what is required below).
Notations:
YCF = Annual cash Flow, R= annual Revenue, C = annual cost ,
PC= production cost per unit, T = annual tax, F= corporate tax rate,
P= Sale Price per unit, V= sales volume
Equations:
SCF = R-C-T, R=P * V, C = PC * V , T= F * (R-C-D) where D= depreciation per year. Use straight line depreciation for n=15 years
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