Review the treasurer's analysis and identify at least one questionable aspect in the box below. Comment on the apparent effect of the item on the treasurer's analysis. a. b. Cost Rate Weighted Cost 0.80 8X Check Weighted average cost of capital Source Proportion Bonds 10% Stock Retained earnings Totals Hurdle or Buffer Margin Percent Cutoff rate for net present value analysis 10 We may compute the annual after-tax cash flows by computing and combining the individual after-tax cash effects. The individual effects are determined by multiplying both the cash revenue and cash expenses by 70% (1 - income tax rate) and multiplying the patent amortization by 30% (the income tax rate). There are 3 steps to calculate After Tax Cash Flow - I have provided Year 1 for you: Show your work or the moth used here (first one provided for you Year 1: $520,000 x 70% $ 434.000 (240,000) x 70% s (168,000) 144,000 x 30% $ 43,200 After-tax cash flow $ 309.200 Year 2: $560,000 x 70% After-tax cash flow Year 3: $400,000 x 70% = Alter-tax cash flow Year 4: $250,000 x 70% After-tax cash flow Year 5: $200,000 x 70% After-tax cash flow Year (N) After-tax Cash Flows (FV) $309,200 Present Value 276,072 Show your work here first one prove PV =$309,200 x 0.89286 = $276,072 @ @ 2 3 4 5 i/Yr 12% 12% 12% 12% 12% a Total present value Investment required Net positive present value What is the recommendation: C-1 Year (N) Original After Tax Cash Flows Revised After Tax Cash Flows (FV) i/Yr (10% Revenue Reduction) x 1 Tax Rate) (62,000 x 70%) Present Value 309,200 237,321 2 3 4 265,800 @ 12% la 12% a 1296 fa 12% 12% Total present value Investment required Net positive present value 5 Whar is the conclusion: EYK12-1. Business Decision Case New Haven Corporation recentiy identified an investment opportunity involving the purchase of a patent that will permit the company to modify its line of CD recorders The patent's purchase price is $720,000 and the legal protection it provides will last for five more years; there is no salvage value. However, after preparing the capital expenditure analysis below, New Haven's treasurer has recommended to the company's capital budgeting committee that the investment be rejected. Brad Decker, chairperson of the capital budgeting committee, finds it diffi- cult to accept the treasurer's analysis because he "feels intuitively" that the investment is attractive. For this reason, he has retained you to review the treasurer's analysis and recommendation. You are provided with the following data and summary of the treasurer's analysis: 1. Required investment: $720,000 cash for the patent to be amortized on a straight-line basis, five-year useful life, with a zero salvage value. 2. Projected cash revenue and operating expenses: Year Cash Revenue Cash Expenses 1 2 3 4 5 $ 620,000 560,000 400,000 250,000 200,000 $2,030,000 $240,000 200,000 170,000 80,000 50,000 $740,000