Assign 1 sem 3 11 12-revised

MME 3113: Engineering Management
ASSIGNMENT #1
Computation of financial ratios
Total Marks:25 + 50 + 60 =135

Problem #4 [8+2=10] Consider the balance sheet entries in Table 1 for Iron Eagle Corporation.
(a) Compute the firm’s (i) Current assets (ii) Current liabilities (iii) Working capital, (iv)
Shareholders’ equity
(b) If the firm had a net income of $550,000 after taxes, what is the earnings per share.

Table 1. Balance Sheet Statement as of December 31,2009
Assets
Cash $160,000
Marketable securities 210,000
Accounts receivable 160, 000
Inventories 60,000
Prepaid taxes and insurance 40,000
Manufacturing plant at cost $620,000
Less accumulated depreciation 100, 000
Net fixed assets 520,000
Goodwill 30,000

Liabilities and Shareholder’s Equity
Notes payable 60,000
Accounts payable 110,000
Income taxes payable 90,000
Long-term mortgage bonds 410,000
Preferred stock, 6%, $110 par value (1,000 shares) 110,000
Common stock, $16 par value (10,000 shares) 160,000
Capital surplus 160,000
Retained earnings 80,000

Problem #5 [1½x10 =15] Table 2 summarizes the financial conditions for Apple Computer
Corporation. The closing stock price for Apple was $128.24 on September 26, 2008. The average
number of outstanding shares was 892.11 million. On the basis of the financial data presented,
compute the various financial ratios and make an informed analysis of Apple’s financial health.

(a) Debt ratio (b) Times-interest-earned ratio (c) Current ratio (d) Quick (acid-test) ratio (e)
Inventory turnover ratio (f) Day’s-sales-outstanding (g) Total-assets-turnover ratio (h) Profit
margin on sales (i) Return on total assets (with a tax rate of 40%) (j) Return on common equity

Table 2 Financial Statements for Apple Computer
All numbers in thousands

Period Ending 27-Sep-08 29-Sep-07 30-Sep-06

BALANCE SHEET

Assets
Current Assets
Cash and Cash Equivalents 11,875,000 9,352,000 6,392,000
Short-Term Investment 12,615,000 6,034,000 3,718,000
Net Receivables 6,151,000 4,811,000 3,452,000
Inventory 509,000 346,000 270,000
Other Current Assets 3,540,000 1,413,000 677,000
Total Current Assets 34,690,000 21,956,000 14,509,000
Long Term Investment - - -
Property Plant and Equipment 2,455,000 1,832,000 1,281,000
Goodwill 207,000 38, 000 38, 000
Intangible Assets 352,000 382,000 160,000
Accumulated Amortization - - -
Other Assets 641,000 1,051,000 1,217,000
Deferred Long-term Asset Charge 1,227,000 88,000 -
Total Assets 39,572,000 25,347,000 17,205,000
Liabilities
Current Liabilities
Accounts Payable 8,558,000 6,230,000 6,471,000
Short/Current Long-Term Debt - - -

Other Current Liabilities 5,534,000 3,069,000 -

Total Current Liabilities 14,092,000 9,299,000 6,471,000
Long Term Debt - - -
Other Liabilities 746,000 67,000 14,000
Deferred Long-term Liability Charge 3,704,000 1,449,000 736,000
Minority Interest - - -
Negative Goodwill - - -
Total Liabilities 18,542,000 10,815,000 7,221,000
Stockholder’s Equity
Preferred Stock - - -
Common stock 7,177,000 5,368,000 4,355,000
Retained Earnings 13,845,000 9,101,000 5,607,000
Treasury Stock - - -
Capital Surplus - - -
Other Stockholder Equity 8,000 63,000 22,000
Total Stockholder Equity 21,030,000 14,532,000 9,984,000
Net Tangible Assets $20,471,000 $14,112,000 $9,786,000

Continued

All numbers in thousands

Period Ending 27-Sep-08 29-Sep-07 30-Sep-06

INCOME STATEMENT
Total Revenue 32,479,000 24,006,000 19,315,000
Cost of Revenue 21,334,000 15,852,000 13,717,000
Gross Profit 11,145,000 8,154,000 5,598,000
Operating Expenses
Research Development 1,109,000 782,000 712,000
Selling General and Admin 3,761,000 2,963,000 2,433,000
Operating Income or Loss 6,275,000 4.409,000 2,453,000
Income from Continuing Operations
Total Other Income/Expenses Net 620,000 599,000 365,000

Earnings Before Interest and Tax 6,895,000 5,008,000 2,818,000
Interest Expense - - -
Income Before Tax 6,895,000 5,008,000 2,818,000
Income Tax Expense 2,061,000 1,512,000 829,000
Minority Interest - - -
Net Income From Continuing Ops 4,834,000 3,496,000 1,989,000
Net Income 4,834,000 3,496,000 1,989,000
Preferred Stock And Other Adjustments - - -
Net Income To Common Shares 4,834,000 3,496,000 1,989,000

Application of the concept of simple and compound interest,
Cash-flow diagram and Rule of 72

Total Marks: 50
Prob #1 [4]: A start-up chemical company has established a goal of making at least a 25% per
year rate of return on its investment. If the company acquired $40 million in venture capital, how
much did it have to earn in the first year.

Prob #2 [4]: An investment of $40,000 one year ago and $50,000 one year from now are
equivalent at what interest rate?

Prob #3 [4]: How long will it take for an investment of $100,000 to accumulate to $200,000 at
an interest rate of 10% per simple interest?

Prob #4 [10]: A company that manufactures in-line mixers for bulk manufacturing is
considering borrowing $1.75 million to update a production line. If it borrows the money now, it
can do so at an interest rate of 10% per simple interest for 5 years. If it borrows next year, the
interest rate will be only 8% per year, but the interest rate will be compound interest for 4 years.

(a) How much interest (total) will be paid under each scenario?

(b) Should the company borrow now or 1 year from now?

Assume the total amount due will be paid when the loan is due in either case.

Prob #5 [3]: Rank the following from the lowest to the highest interest rate:

Cost of capital, acceptable rate of return on an investment, minimum attractive rate of return on a
safe investment.

Prob #6 [5]: Construct a cash flow diagram for the following cash flows: $10,000 outflow at
time zero, $3000 per year inflow in years 1 through 5 at an interest of 10% per year, and an
unknown future amount in year 5.

Prob #7 [5]: Construct a cash flow diagram to find the present worth for the following situation
at an interest rate of 20% per year:

Year Cash Flows

0 $-50,000

1-7 $ -8,000

Prob #8 [5]: Construct a cash flow diagram that represents the amount of money that would be
accumulated in 15 years from investment of $20,000 now at an interest rate of 8% per year.

Prob #9 [5]: Estimate the time it would take for money to quadruple in value at a compound
interest rate of 8%. (Use the rule of 72).

Prob #10 [5]: Use the rule of 72 to estimate the interest rate that would be required for $5000 to
accumulate to $10,000 in 5 years.

Application of Cash flow formulae, Investment Analysis
Total Marks: 60

Problem #1 [5] What amount would you need to pay each January 1 into a savings account if at the end
of 15 years (15 payments) you desire RM 30,000? Annual interest is 7%. (Note: The last payment will
coincide with the time of RM 30,000 balance.)

Problem #2 [5] A future amount, F, is equivalent to $1,500 now when six years separate the amounts and
the annual interest rate is 12%. What is the value of F?

Problem #3 [6] A present obligation of $20,000 is to be repaid in equal uniform annual amounts, each of
which includes repayment of the debt (principal) and interest on the debt, over a period of five years. If
the interest rate is 10% per year, what is the amount of the annual repayment?

Problem #4 [7+5=12] Suppose that the $20,000 in problem 3 is to be repaid at a rate of $4,000 plus the
interest that is owed based on the beginning-of-year unpaid principal.

(a) Compute the total amount of interest repaid in this situation and compare with that of problem 3.
(b) Why are the two amounts different?

Problem #5 [5+7=12] It is estimated that a copper mine will produce 10,000 tons of ore during the
coming year. Production is expected to increase by 5% per year thereafter in each of the following six
years. Profit per ton will be $14 for years one through seven.

(a) Draw a cash flow diagram for this copper mine operation from company’s point of view.
(b) If the company can earn 10% per year on its capital, what is the future equivalent of the copper
mine’s cash flows at the end of year seven?

Problem # 6 [8+7+5=20] A project engineer with EnvironCare is assigned to start up a new
office in a city where a 6-year contract has been finalized to take and to analyze ozone-level
readings. Two lease options are available, each with a first cost, annual lease cost, and deposit-
return estimates as shown below:

Data and Information Location A Location B

First cost, $ - 15,000 - 18,000

Annual lease cost, $ per year -3,500 -3,100

Deposit return, $ 1,000 2,000

Lease term, years 6 9

(a) Determine which lease option should be selected on the basis of a present worth
comparison, if the MARR is 15% per year.
(b) EnvironCare has a standard practice of evaluating all projects over a 5-year period. If a
study period of 5 years is used and the deposit returns are not expected to change, which
location should be used?
(c) Which location should be selected over a 6-year study period if the deposit return at
location B is estimated to be $6000 after six years?

Note: Date of Submission: 19/07/2012,
Delay will cost @ 25% marks per day
No need of submission after 1 day from the due date.

Tips for submission:
o Use a cover page (Noncompliance will cost you 10 marks),
o Write down your matric #, name, course title, assignment number etc.
o Put the ‘Due date for Submission’ and the ‘Date of Submission’
o Try to solve the problems yourself for deeper understanding. (In case of dire need, u can seek help
from your friends, or can consult your concerned lecturer)

Assign 1 sem 3 11 12-revised

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