1. Some financial analysts use P/E ratio to estimate the share price. Comment on this approach by listing advantage and dis advantage of this approach. (5 marks)

Investment proposal #1 - adding 5 trucks

	Initial expenditure	Year 1	Year 2	Year 3	Year 4	Year 5
Net cost of trucks	$ 300,000
Additional Revenue		$ 44,000	$ 76,000	$ 112,000	225,000	$168,000
Additional cost		(11,000)	(11,000)	(11,000)	(11,000)	(11,000)
Amortization		(45,000)	(66,000)	(63,000)	(63,000)	(63,000)
Net increase in income		(12,000)	(1,000)	38,000	151,000	94,000
Less: Tax at 33%		0	0	(12,540)	(49,830)	(31,020)
Increase in after-tax income		(12,000)	(1,000)	25,460	101,170	62,980
Add back amortization		45,000	66,000	63,000	63,000	63,000
Net change in cash flow	$(300,000)	$33,000	$65,000	$88,460	$164,170	$125,980

The second proposal is to purchase a more advanced wood crafting machine. The projected revenues and costs and changes in net cash flow are summarized in the table below:

Investment proposal #2 - adding a wood crafting machine:

	Initial expenditure	Year 1	Year 2	Year 3	Year 4	Year 5
Net cost of trucks	$ 700,000
Additional Revenue		$ 87,000	$ 175,000	$ 262,000	393,000	$325,000
Additional cost		(26,000)	(26,000)	(26,000)	(26,000)	(26,000)
Amortization		(17,000)	(17,000)	(17,000)	(17,000)	(17,000)
Net increase in income		44,000	132,000	219,000	350,000	282,000
Less: Tax at 33%		(14,520)	(43,560)	(72,270)	(115,500)	(93,060)
Increase in after-tax income		29,480	88,440	146,730	234,500	188,940
Add back amortization		17,000	17,000	17,000	17,000	17,000
Net change in cash flow	$(700,000)	$46,480	$105,440	$163,730	$251,500	$205,940

The third proposal is to add a new production line making new type of baby furniture. The projected increased revenues and costs and net changes in cash flows are summarized in the table below:

Investment proposal #3 - adding a new product line:

	Initial expenditure	Year 1	Year 2	Year 3	Year 4	Year 5
Net cost of trucks	$ 510,000
Additional Revenue		$ 381,000	$ 310,000	$ 87,000	$70,000	$ 51,000
Additional cost		(19,000)	(19,000)	(25,000)	(31,000)	(38,000)
Amortization		(76,000)	(112,000)	(107,000)	(107,000)	(107,000)
Net increase in income		286,000	179,000	(45,000)	(68,000)	(94,000)
Less: Tax at 33%		(94,380)	(59,070)	0	0	0
Increase in after-tax income		191,620	119,930	(45,000)	(68,000)	(94,000)
Add back amortization		76,000	112,000	107,000	107,000	107,000
Net change in cash flow	$(510,000)	$267,620	$231,930	$62,000	$39,000	$13,000