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QUESTION: The table below is the cash flow estimation has been prepared by Mr Michael, an executive of OneEx Corp. YEAR ($, thousands) 0 1 to 10 (1,000) 100 15 1.500 800 700 Initial cost Units sold Price unit Total revenue Cost of goods sold Gross Profit Operating expenses Depreciation Interest expense Income before tax Tax at 40% Income after tax 100 100 500 200 300 Michael reached out Austin, his partner in the upcoming project to discuss on the figures. Their conversation are as follows: Michael: "Austin, here's how I figured it. Boss says our company's goal should be to increase revenue by at least 15% every year, and this project definitely increases eamings. It adds $300,000 to net income after tax every year. My trusty calculator tells me that the rate of return on this project is 30% ($300,000/$1,000,000), well above our minimum farget return of 10%. If you want to discount the value is NPV discounted at 10% is approximately $844.00. So, what is your view on this Austin?" Austin: 'Well, Michael, it looks pretty good, but I have some questions." Michael: Shoot , Austin." Austin: 'What about increases in accounts receivable and stuff like that?" Michael: "Not relevant. We will get that money back after the project ends, so it amounts to an interest-free loan, which is more of a benefit than a cost." Austin: "But, Michael, what about the additional selling and administrative costs? Haven't you left those out?" Michael: "That is the beauty of this, Austin. Given the recent recession, I figure we can handle the added business with existing personnel. In fact, one of the virtues of the proposal is that we should be able to retain some people we would otherwise have to terminate." Austin: "Well, you ve convinced me, Michael. Now, I think it will be only fair if the boss gives you the responsibility of the existing new project." Required: As a student of financial management, discuss how many errors you can spot and explain briefly why each is an error. By giving your own assumptions when needed, prepare a new cash flow estimation for the next 10 years. QUESTION: The table below is the cash flow estimation has been prepared by Mr Michael, an executive of OneEx Corp. YEAR ($, thousands) 0 1 to 10 (1,000) 100 15 1.500 800 700 Initial cost Units sold Price unit Total revenue Cost of goods sold Gross Profit Operating expenses Depreciation Interest expense Income before tax Tax at 40% Income after tax 100 100 500 200 300 Michael reached out Austin, his partner in the upcoming project to discuss on the figures. Their conversation are as follows: Michael: "Austin, here's how I figured it. Boss says our company's goal should be to increase revenue by at least 15% every year, and this project definitely increases eamings. It adds $300,000 to net income after tax every year. My trusty calculator tells me that the rate of return on this project is 30% ($300,000/$1,000,000), well above our minimum farget return of 10%. If you want to discount the value is NPV discounted at 10% is approximately $844.00. So, what is your view on this Austin?" Austin: 'Well, Michael, it looks pretty good, but I have some questions." Michael: Shoot , Austin." Austin: 'What about increases in accounts receivable and stuff like that?" Michael: "Not relevant. We will get that money back after the project ends, so it amounts to an interest-free loan, which is more of a benefit than a cost." Austin: "But, Michael, what about the additional selling and administrative costs? Haven't you left those out?" Michael: "That is the beauty of this, Austin. Given the recent recession, I figure we can handle the added business with existing personnel. In fact, one of the virtues of the proposal is that we should be able to retain some people we would otherwise have to terminate." Austin: "Well, you ve convinced me, Michael. Now, I think it will be only fair if the boss gives you the responsibility of the existing new project." Required: As a student of financial management, discuss how many errors you can spot and explain briefly why each is an error. By giving your own assumptions when needed, prepare a new cash flow estimation for the next 10 years

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