ACC – Papillon Systems LLC (PSL)

Papillon Systems LLC (PSL) – Please see the attached question and excel spreadsheet. As Mary Davis, CFO of PSL, provide a two year post investment appraisal covering the financial investment and prepare the draft report covering financial performance for the board of MSI. Review the financial information spreadsheet as it includes the variables, NPV analysis, project evaluation, budget/projection for 2011, and schedule of CCA/UCC. For 2012, we must ensure that the Internal Rate of Return (IRR) is equivalent to 9.62% when building out the budget/projection for 2012. Note: P&L = Profit and Loss.Papillon Systems LLC(Capital Budgeting I)Three years ago Multi Star Inc (MSI) identified and studied a new market frontier. MSI staff establishedthat outsourcing data storage was a market to be exploited and was consistent with the companys corecompetencies. The DCF based capital budgeting model used by the company pointed to a favorable netpresent value. The project also aligned to the corporate strategy and was, at worst, neutral towardPSLs corporate social responsibility initiatives. (See exhibit one for the original data and the net presentvalue calculations).Papillon Systems LLC (PSL) was incorporated and began operations 25 months ago. The company is100% owned by MSI. PSLs sole business is third party business data storage. The company ties into acustomers client server platform and manages all data retrieval and storage including backup andreconstruction in the event of data loss. PSL managements opinion is that the business has gone as wellas can be expected in regard to profit (see exhibit two) and in regard to customer satisfaction.Marketing and operations have their eye on the CSI (customer satisfaction indexes) and will provide areport to the board of MSI in due course.The board of MSI has asked PSLs CFO, Mary Davis, to provide a two year post investment appraisalcovering their financial investment in PSL. PSLs financial accounting staff have prepared a summary offinancial operations (see exhibit two). As the CFO looks at the summary, she notices that there has beenno accounting for inflation. (Inflation has been constant at 3% per year for the last number of years.)She also made a note to consider different options to account for the physical wear and tear of theequipment. In her opinion depreciation should be recorded using a super accelerated rate over twoyears due to the nature of the assets used (ie: digital technology including software).Ms. Davis has tasked, Sharon Scott, an independent management accountant, to complete the postinvestment appraisal and prepare the draft report covering financial performance for the board of MSI.REQUIRED:As Sharon Scott, complete the task assigned by Mary Davis.Papillon Systems LLCSchedule of the DCF Capital Budgeting ModelInitial cost of office equipmentInitial cost of hardwareInitial cost of softwareWorking capital requirementCost of system maintenanceYear of system maintenanceLife of the investmentOperating cash inflowOperating cash out flow (including R&M)Salvage value of office equipmentSalvage value of hardwareSalvage value of softwareDiscount rate (WACC)Tax rateCCA rate on office equipmentCCA rate on hardwareCCA rate on softwareExhibit 1$$$$$$$$$$100,000500,000300,000100,000225,00025410,000100,00036,864102,0435.00402030100NPV analysisCost of office equipmentCost of hardwareCost of softwareWorking Capital Investedyears%%%%%(100,000)(500,000)(300,000)(100,000)PV of two year upgradePV of Net Cash Inflow (after tax)PV Working Capital RecapturedPV of Office equip SalvagePV of Hardware SalvagePV of Software SalvageTax Shield:from Purchase Office Equipfrom Purchase Hardwarefrom Purchase Softwarelost from sale of Office equiplost from sale of Hardwarelost from sale of SoftwareNet Present Value(122,449)805,28378,35328,88479,95331,238167,347111,565(9,243)(27,412)-273,494143,518Schedule 2Papillon Systems LLCStatement of OperationsFor the two years ended January 31, 2012.Revenues$2011380,000.$2012478,000ExpensesGeneral operating expensesSystem maintenanceDepreciation (SYD)113,000-106,000239,000253,697202,958366,697547,958Profit before tax13,303(69,958)Income taxes30,000(84,200)(16,697)14,242Net IncomeROIN/A2.20%Schedule 3Papillon Systems LLCSchedule of CCA/UCCCCA / Tax ShieldPeriod20%O UCCCCA Tax Shield1100,00010,0004,000290,00018,0007,200372,00014,4005,760457,60011,5204,608546,0809,2163,686CCA / Tax ShieldPeriod30%O UCCCCA Tax Shield1500,00075,00030,0002425,000127,50051,0003297,50089,25035,7004208,25062,47524,9905145,77543,73317,493CCA / Tax ShieldPeriod100%O UCCCCA Tax Shield1300,000150,00060,0002150,000150,00060,000