Cash flows from operations: Given the soaring price of fuel, Fiat is considering introducing a new production line of gas-electric hybrid sedans. The expected annual sales number of such hybrid cars is 30,000; the price is €22,000 per car. Variable costs of production amount to €10,000 per car. The fixed overhead including salary of top executives is €80 million per year. However, the introduction of the hybrid sedan will decrease Fiat’s sales of regular cars by 10,000 cars per year; the regular cars have a unit price of €20,000 and unit variable cost of €12,000 and fixed costs of €250,000 per year. Depreciation costs of the production plant are €50,000 per year. The marginal tax rate is 40 per cent. What is the incremental annual cash flow from operations?

The general ledger account for Accounts Receivable shows a debit balance of $40,000. The Allowance for Uncollectible Accounts has a credit balance of $2,000. Net sales for the year were $250,000. In the past, 3 percent of net sales have proved uncollectible. An aging of accounts receivable accounts results in an estimate of $9,000 of uncollectible accounts receivable.

Calculate (1) Uncollectible Accounts Expense and (2) the ending balance of the Allowance for Uncollectible Accounts using (a) the percentage of net sales method and (b) the accounts receivable aging method.

Create an Excel spreadsheet to submit your assignment.

16-9. (Interest rate risk) Two years ago your corporate treasurer purchased for the firm a 20-year bond at its par value of $1,000. The coupon rate on this security is 8 percent. Interest payments are made to bondholders once a year. Currently, bonds of this particular risk class are yielding investors 9 percent. A cash shortage has forced you to instruct your treasurer to liquidate the bond.
• a. At what price will your bond be sold? Assume annual compounding.
• b. What will be the amount of your gain or loss over the original purchase price?
• c. What would be the amount of your gain or loss had the treasurer originally purchased a bond with a 4-year rather than a 20-year maturity? (Assume all characteristics of the bonds are identical except their maturity periods.)
• d. What do we call this type of risk assumed by your corporate treasurer?

16-13. (Ratio analysis) Assuming a 360-day year, calculate what the average investment in inventory would be for a firm, given the following information in each case.
• a. The firm has sales of $600,000, a gross profit margin of 10 percent, and an inventory turnover ratio of 6.
• b. The firm has a cost-of-goods-sold figure of $480,000 and an average age of inventory of 40 days.
• c. The firm has a cost-of-goods-sold figure of $1.15 million and an inventory turnover rate of 5.
• d. The firm has a sales figure of $25 million, a gross profit margin of 14 percent, and an average age of inventory of 45 days.