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Tutor profile: Satya Narayan M.

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Satya Narayan M.
CPA,FCMA,MBA Senior Finance and Accounts Expert
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Questions

Subject: Corporate Finance

TutorMe
Question:

Suppose that the initial cost of an investment is $75,000, the present value of tax saving from depreciation is $2,000, and the present value after tax terminal value is $30,000. It is expected that the investment will increase yield and this operating receipts by $15,000 per year but it will cost $5,000 a year to pay for electricity, maintenance, and additional labor. There is a pretax discount rate of 12% while the marginal tax rate over the next 5 years is 20%. What is the break-even price of operating receipt?

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Satya Narayan M.
Answer:

Answer: Given: Pretax discount rate = 12% and tax rate = 20% Hence: Post tax discount rate = 12% * (1 - 20%) = 9.60% Given: Initial investment = $75,000 Present value of tax saving from depreciation is = $2,000 Present value after tax terminal value is = $30,000 We know that at break-even price of operating receipt NPV will be equal to zero. Hence: 0 = PV of cash flow from after tax operating receipt + Present value of tax saving from depreciation + Present value after tax terminal value – Initial Investment =>PV of cash flow from after tax operating receipt = Initial Investment - Present value of tax saving from depreciation + Present value after tax terminal value => PV of cash flow from after tax operating receipt = 75000 - 2000 - 30000 = $43,000 Annual after tax operating receipt net of cost = PV of cash flow from after tax operating receipt / PV of $1 annuity for 5 years at discount rate of 9.60% PV of $1 annuity for 5 years at 9.60% = (1 - 1 / (1 + 9.60%) 5) / 9.60% = 3.8298436 Annual after tax operating receipt net of cost = 43,000 / 3.8298436 = 11227.61 Before tax operating receipt net of cost = Annual after tax operating receipt net of cost / (1 – Tax rate) =11227.61 / (1 - 20%) =14034.51 Hence break-even operating receipt = before tax operating receipt net of cost + Annual operating cost = 14034.51 + 5000 = $19,034.51 Hence break-even operating receipt = $19,034.51

Subject: Finance

TutorMe
Question:

Robert wants a fixed -rate mortgage to buy a new home for $180,000. The mortgage bank will charge 7.10% APR for this 300 month loan. Robert could afford monthly payment of $950 only and hence offered to pay off any remaining balance at the end of loan period in form a Single balloon payment. If the bank agreed, what will be the amount of the single balloon payment Robert has to make his monthly payment is $950?

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Satya Narayan M.
Answer:

Answer: Loan amount = $180,000 Monthly interest rate = APR/ 12 = 7.1%/12 Monthly payment = $950 Calculation of single balloon payment: Method 1 using excel function FV Single balloon payment = FV (rate, nper, pmt, pv, fv, type) = FV (7.1%/12, 300, 950, -180000, 0,0) = $274,646.63 Single balloon payment = $274,646.63 Method 2 using formula First we need to calculate present value of month payments: Present value of monthly payments = Periodic payment * (1 – 1 / (1 + Periodic interest) ^ Number of periods) / Periodic Interest = 950 * (1 - 1/ (1 + 7.1%/12) 300) / (7.1%/12) = $133,207.8373 Present value of single balloon payment = Loan amount - Present value of monthly payments = 180000 - 133,207.8373 = 46792.1627 Single balloon payment = Future value of 46792.1627 = 46792.1627 * (1 + 7.1%/12) 300 = $274646.63 Hence: Single balloon payment Robert has to make at the end of loan period = $274,646.63

Subject: Accounting

TutorMe
Question:

In 2017, ABC Construction Corporation got a 2 year contract for price $2,100,000. ABC Recognizes revenue over time based on percentage of completion method. The following are extracts from its financial statement: Balance sheet: Accounts receivable (from construction billing) $35,000 Construction in progress $150,000 Less: Billing on construction contract ($143,000) Cost and Profit of uncompleted contracts in excess of billing $7,000 Income Statement: Income before tax from contract recognized in 2017 $25,000 Question: 1. What is actual cost incurred in 2017? 2.What is amount of cash collected in 2017? 3.What is the estimated cost to complete as of end of 2017?

Inactive
Satya Narayan M.
Answer:

Answer 1: Actual costs incurred in 2017 = Construction in progress - Income recognized =150000 - 25000 = $125,000 Answer 2: Cash collected in 2017 = Billings in 2017 - Ending balance of account receivable = 143000 - 35000 = $108,000 Answer 3: Revenue recognized = Percentage completion * Total Contract price Percentage completed = Revenue recognized / Total Contract price Revenue Recognized = Actual cost incurred this year + Income recognized = 125000 + 25000 =$125,000 Hence: Percentage completed = 150000 / 2100000 (i) Let us assume estimated cost to complete as of end of 2017 = X Percentage completion = Actual cost incurred till date / Estimated total cost (ii) Estimated total cost = Actual cost incurred till date + Estimated cost to complete Hence: From (i) and (ii): Actual cost incurred till date / Estimated total cost = 150000 / 2100000 Estimated total cost = 2100000 * 125000 / 150000 = $1,750,000 Estimated cost to complete = 1750000 - 125000 = $1,625,000 Estimated cost to complete = $1,625,000 Answers: 1 Actual costs incurred in 2017 $125,000 2 Cash collected in 2017 $108,000 3 Estimated cost to complete as of end of 2017 $1,625,000

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