Frank Smith Plumbing, Cash Flow Analysis help

  

Analyze the case study, “Frank Smith Plumbing.”Analyze the “Frank Smith Plumbing’s Financial Statement” spreadsheet.Compare the cost of the truck to the cash flow recordsCompile your calculations in a Microsoft® Excel® documentDevelop a 1,050-word analysis and include the following:Explain why limited leverage is good for business.Show the profitability of the project so that Stephanie can convince her father to purchase the truck by borrowing money.Explain how Stephanie should convince her mother that it is inappropriate to call the bank manager and his wife for assistance in getting the loan approval?Analyze whether the investment in the truck is profitable.Explain whether it is more beneficial for Frank to close his business.Explain what you would do in this same situation.Format your assignment consistent with APA guidelines.
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Frank Smith Plumbing
Project
Cost of Capital (borrowing)
12.00%
Cost of Truck
$200,000
Cost of additional equiment attached to truck
$15,000
Tax rate
35%
Annual Before Tax & Depreciation Truck Projected Earnings

Data Needed for analysis:
Year-1
Year-2
$70,000
$70,000
Depreciation Percentage Rate (MACRS)*
20.0%
32.0%
* The proposed truck has an estimated economic life of seven years but will be treated as a five-year MACRS property
Calculate the following — light yellow highlighted cells need to be co
Year-0
Annual Before Tax & Depreciation Truck Projected Earnings
Depreciation Expense
Annual Before Tax Truck Projected Earnings

Tax
Annual Projected Truck Earnings

Year-1
Year-2

Depreciation to add back
Projected Truck Net Cash Flow
Decision Criteria:
Pay Back Period
Discounted Pay Back Period (DPB)**
Net Present Value
Internal Rate of Return
Profitability Index
Years
Years
Discounted Cash Flow Needed for DPB Calc.
Recommendations:
mith Plumbing
ded for analysis:
Year-3
Year-4
Year-5
Year-6
Year-7
Year-8
$65,000
$60,000
$55,000
$50,000
$40,000
$30,000
19.2%
11.5%
11.5%
5.8%
ted as a five-year MACRS property for depreciation purposes.
0.0%
0.0%
Year-7
Year-8
ow highlighted cells need to be completed
sion Criteria:
mmendations:
Year-3
Year-4
Year-5
Year-6
Cash Flow Analysis
FIN/370 Version 10
University of Phoenix Material
Frank Smith Plumbing
Mohammed R. Ahmed, DBA and Betty E. Ahmed, DBA
Read the following case study to complete the Week 4 assignment.
Frank Smith has been a plumber in the college town of Turlock, CA for the last thirty years. All the people
who know him call him Frankie because he is friendly, social, and charges a fair price for his services.
His business has grown because new customers become repeat customers. He has worked hard to
support his family and has raised three children who have attended the local school system. However, in
recent years, he has had to work overtime to ensure he has the funds to financially support his daughter
in the business program at the local state university. He encourages all his children to pursue a college
education because he knows it will be valuable in their futures and, as a rule, Frank has never believed in
borrowing money. Every time he has purchased something — such as tools, vehicles, equipment, or
even his children’s college educations — he has paid in cash.
Frank has been using his plumbing truck for the last 14 years. However, recently it has begun stalling and
the mechanic has recommended buying a new fuel-efficient truck rather than repairing his old, gasguzzling one. Unfortunately, Frank has used all of his money to pay for his living expenses and
daughter’s college education. He has explored purchasing a new truck and does not have enough cash
saved to buy one outright.
Recently, the Smith family got together for dinner, and Frank started explaining that it was time to forego
self-employment in favor of working for a plumbing company because he could not afford to buy a new
truck. The family reacted in sorrow, lamenting that Frank would be forced to work for a company when
he had been running a successful business on his own for so long.
The eldest daughter, Stephanie, a senior studying business administration, listened to her father and after
a pause, said, “You do not have to give up your business. You can borrow money from the bank, pay
monthly installments on the truck, and still have the independence of owning your own business.”
Frank’s wife, Elena, joined the conversation and reminded Frank that he has been servicing Hosea
Garcia, the manager of the community bank, for the last two decades. Elena told Stephanie to contact
Garcia because she was sure he would help Frank get the loan. Stephanie responded that it would not
be proper to contact Hosea privately and ask for assistance because, as the manager of the bank, Garcia
has to follow strict rules when evaluating the creditworthiness of the borrower before the bank can lend.
Stephanie further explained the importance of ethics in the financial service industry: she reminded her
mother that banks, in particular, are very strict when lending money, especially after the 2008 financial
crisis. Based on what she learned in her ethics class, Stephanie explained that it was not appropriate to
contact the bank manager. Instead, she advised the best approach would be to go through all the
financials, prepare cash flow statements for Frank’s business, fill out a loan application, provide all the
required bank documents and let the bank decide on the loan. Based on the financial information,
Stephanie felt that her dad would be approved for the loan.
However, Elena said, “I am not going to take that chance of your dad having to go to work for somebody
else. I am going to call Hosea and his wife tomorrow and tell him to help get the loan. You do whatever
you need to do, and I will do what I need to do.”
This put Stephanie in a difficult position. On one hand, she was aware of the ethical issues involved and
on the other hand, she did not want her father to have to give up his business. Unsure of how to handle
the situation, Stephanie decided to research and get advice on the ethical issues at school the next day.
Copyright © 2015 by University of Phoenix. All rights reserved.
1
Cash Flow Analysis
FIN/370 Version 10
In the meantime, Stephanie explained to her father, “Based on what I have learned in business school,
entrepreneurship is the key to success, and limited leverage is always good for business. You have been
working for over 20 years and based on your income, you should not have any problem borrowing from
the bank.”
Frank asked his daughter, “Stephanie, how can I make profits and pay this much money for the truck?”
Stephanie replied, “I am going to take all the information, check with the bank, and do a financial analysis
to determine whether the investment in the truck is profitable or not. You have paid for my education, and
I am going to pay you back by applying my knowledge to help you make a good business decision.”
Stephanie gathered the information found in the attached spreadsheet. The information includes the
cost of the truck, cost of additional equipment on the truck, cost of capital, tax rate, and the life of the
truck. It also includes cash inflows generated from the use of the truck.
Complete the following tasks:
1. Assume you are Stephanie, research whether there is an ethical problem with Elena calling the bank
manager and his wife and getting the loan approved. If there is an ethical issue, how should Stephanie
convince her mother that it is inappropriate to call the bank manager and his wife for assistance in getting
loan approval?
2. Explain why limited leverage is good for business.
3. Based on the given information, tax rate, and depreciation show the profitability of the project so that
Stephanie can convince her father to purchase the truck by borrowing money.
Copyright © 2015 by University of Phoenix. All rights reserved.
2
Cash Flow Analysis Grading Guide
FIN/370 Version 10
Individual Assignment: Cash Flow Analysis
Purpose of Assignment
In Week 4, students will have the opportunity to review and analyze a case study. This case study gives
students the ability to crunch the numbers associated with Frank’s Plumbing and give Frank the benefit of their
education. They will create a spreadsheet and write an analysis of their findings.
Resources Required
Finance Chapter 11; Finance Chapter 12; Finance Chapter 13, Frank’s Plumbing documents
Grading Guide
Met
Content
Partially
Met
Not Met
Total
Available
Total
Earned
7
#/X
Partially
Met
Not Met
Comments:
Develop a 1,050-word analysis.
Explain why limited leverage is good for
business.
Show the profitability of the project so that
Stephanie can convince her father to
purchase the truck by borrowing money.
Explain how Stephanie should convince her
mother that it is inappropriate to call the bank
manager and his wife for assistance in getting
loan approval.
Analyze whether the investment in the truck is
profitable.
Explain whether it is more beneficial for Frank
to close his business.
Explain what you would do in this same
situation.
Met
Writing Guidelines
The paper — including tables and graphs,
headings, a title page, and a reference page
— is consistent with APA formatting
guidelines and meets course-level
requirements.
The paper includes properly cited intellectual
property using APA style in-text citations and
a reference page.
Copyright © XXXX by University of Phoenix. All rights reserved.
Comments:
1
Cash Flow Analysis Grading Guide
FIN/370 Version 10
The paper includes paragraph and sentence
transitions that are logical and maintain flow
throughout the paper.
The paper includes sentences that are
complete, clear, and concise.
The paper follows proper rules of grammar
and usage including spelling and punctuation.
Total
Available
Total
Earned
#/X
Assignment Total
#
10
#/X
Additional comments:
Copyright © XXXX by University of Phoenix. All rights reserved.
2

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