ASSIGNMENT #8

1. Your B.C. based CCPC has a startup (Year 0) balance sheet as shown below. During year #1, you ship $250,000 in product. Your expenses are $50,000 for materials, $100,000 for labor, and $10,000 misc. operating costs. Selling and administrative expenses are $15,000, marketing and sales costs are $20,000 and R&D expenses are $30,000 (you claim SRED on the entire amount). Your accounts receivable balance at the end of year #1 is $60,000. Inventory and A/P are unchanged. Draw up a P&L statement and Balance Sheet for Year #1.
(Notes payables are for equipment purchases at 0% financing due in 3 years. Round $ to nearest $1000.) State any other assumptions you make.

ASSETS	$K	LIABILITIES & EQUITY	$K
Cash	20	Accts Payable	80
Inventory (matls)	90	Notes Payable	60
Equipment	80
		Common Shares	50
Total Assets	190	Total Liab & Equity	190

P&L For Year #1 ending June 30, 2003:	$K
Sales	250
Cost of Goods Sold	160
Gross Margin	90

G&A	15
M&S	20
R&D	30
less SRED	-20
Op Costs	45

NPBT	45
Taxes	9
NPAT	36

The SRED credit is 68% of R&D (using the assumptions stated, i.e. that this is a CCPC and all R&D is claimed). This must be shown as a reduction of R&D Costs. Taxes must be shown. A reasonable tax rate would be approx. 20% (for a CCPC in BC). This produces a Net Profit After Tax of $36K. This profit must be reported on the Year #1 balance sheet under earnings.

Balance Sheet at June 30, 2003:
ASSETS		LIABILITIES & EQUITY

Cash	-4
A/R	60	A/P	80
Inventory	90	*Notes Payable (current)	60
Equipment	80
		Common Shares	50
		Earnings	36
Total Assets	226	Liabilities & Equity	226

To make the balance sheet balance, cash on hand needs to be -$4K, i.e. a small bank overdraft. Since A/P, Inventory, and Equipment are unchanged and given A/R of $60K, cash is the obvious entry to change. This example points out that, even with a nicely profitable business with good margins, cash flow is negative resulting in a small cash deficit. Note: to keep this simple, we've shown the SRED credit and tax calculation in year #1, although technically this is handled a little differently, i.e. the SRED refund is taxed in the year when it is received. In this case, the after tax earnings would be $40K (i.e. taxes of $5K on $25K profit). Either way is acceptable for performing these calculations. "Notes Payable", i.e. the $60K in equipment financing comes due in 2003 and must be shown as a current liability. Otherwise, nothing needs to be done with it from a reporting perspective.

2. You want to get yourself a slick new Nissan Sentra. It is advertised in this week's Sun at $15,748.
    You can lease it for $199/month (with a $995 down payment) or finance it at 1.8%.
    What are your monthly payments if you decide to finance it?
    What is the interest rate that you are paying on the lease?
    (assume a 60 month lease with a 25% buyout option and a 60 month finance plan)
    Note: Show your calculations or the spreadsheet formulas used to determine your answers.

Interest rate, use: =12*IRR(values,0) where values are the monthly cashflows, i.e. =-(15748-995) in column 1, +199 in the next 60 columns, then .25*15748 in the last column = 1.96%

3. Normally, interest rates are expressed as annual rates. However, if interest is calculated on a monthly basis, the "effective" interest rate is actually somewhat higher. If you are quoted 12% on a loan with monthly payments, what is the effective interest rate?

4.Chester Carlson invented Xerography. Surprisingly, no one else was working on copier technology at that time. Indeed, no one appeared interested in this. RCA, GE, IBM etc all declined his invention showing an “enthusiastic lack of interest”. Why?

ANS: They couldn't see the demand and/or the opportunity and the technology was too revolutionary.

5. The Consulting Firm of Arthur D. Little produced a report that said the market for Xerox copiers would be saturated with 5,000 machines. Yet, in the first two years of production, Xerox sold over 10,000 machines. With reference to one (or more) of the 4Ps (other than the Product P), how did tiny Haloid Xerox Corp (yes, it started as a tiny company) get people to adopt their 914 copier?

ANS: Pricing - the sold it on a "per copy" pay-as-you go basis rather than for a big capital cost price tag - made it look inexpensive and affordable (5 cents a copy)

Updated: 26Nov07 with submission instructions
Updated: 28Nov07 to change 2003 to year 3 in Question 1