90.2K

Verified Solution

Link Copied!

Riverside Technologies Incorporated (RTI) is a small firm in North Sioux City, SD which provides IT solutions for other companies. In addition to providing IT services and computer hardware (i.e. laptops, desktops, and tablets), RTI has decided to add customized computer bags for companies as well. Companies can have RTI create computer bags and other accessories with a custom logo. Suppose a firm like RTI wants to add embroidery service to their customers. The firm would need to invest in a high-end embroidery machine which can embroider high quality graphics and can handle repeated use on backpacks, laptop cases, and tablet covers. The machine will cost $75,000, has an expected life of 5 years, and will be fully depreciated after 5 years under a straight-line depreciation. The firm will also need to hire someone to operate the machine at a salary of $45,000 per year plus benefits equal to 20% of salary. The firm provides a cost of living increase to salary (including benefits) of 3% annually. Suppose the firm has enough in cash reserves to finance this expansion into a new product line themselves; however, they could also take out a loan to finance the expansion. If financing the expansion themselves, they will be giving up 2% interest in a CD account. If they borrow an interest-only loan to finance the expansion, they will pay an interest charge equal to 5.25% of the loan amount annually; the principal (loan amount) will be paid at the end of Year 5. The firm's sales department has assured management that they will be able to sell laptop bags, backpacks, or tablet cases to a minimum of 3000 customers. Each customized item will sell for $45 and costs $15 to purchase and customize.

a) Calculate net cash flow each year for both the self-financing scenario and debt-financing scenario. (Assuming a 12% tax rate)

b) Find the net present value (NPV) for both the self-financing scenario and debt-financing scenario using either the CD interest rate or loan rate as appropriate.

c) How should the firm finance this expansion? Why?

PLEASE.....send me the formula to put on my excel spreadsheet for each projection. Please send back like =SUM(B2/A2) the answer solution has to be the formula in the cell send both the formula and the actual number in the cell just so that I will now once I put in the formula then I will see the correct answer in numbers......send both in your reply formula and answer. I can't just put the number I need for formula.

Years	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Investment	-75,000
Sales unit [1]
Price per unit [2]
Total revenue [1*2]
Cost per unit [3]
Total cost [1*3]
Salary
Depreciation
Income before tax
Tax (12%)
Profit after tax
Cash flow
Income before tax = Total revenue+Total cost+Salary+Depreciation
Tax = -12%*Income before tax
Profit after tax = Income before tax+Tax
Cash flow = Initial investment-Depreciation+Profit after tax
For self financing, the after tax cost of capital = (1-tax rate)*opportunity cost = (1-12%)*2% = 1.76%
Net present value (NPV) = Sum of CF1/(1+after tax cost of capital)1, where CF 1 is the cash flow in year 1
Therefore, NPV = -75000+33480/(1+1.76%)+32054/(1+1.76%)2+30586/(1+1.76%)3+29074/(1+1.76%)4+27516/(1+1.76%)5 = 70213

Answer & Explanation Solved by verified expert

See Answer