Capital Investment Appraisal

Aims… For you to be able to understand the

concepts of Payback, ARR, IRR, DCF & NPV

To be able to calculate Investment Appraisal methods.

What is an Investment? What is an Investment?

Any act which involves the sacrifice of an immediate and certain level of consumption in exchange for the expectation of an increase in future consumption.

forgo the present consumption in order to increase resources in future

An investment requires expenditure on something today that is expected to provide a benefit in the future

the decision to make an investment is extremely important because it implies;

the expectation that expenditure today will generate future cash gains in real terms that greatly exceed the funds spent today

What is an Investment? What is an Investment?

Investment Appraisal A means of assessing whether an

investment project is worthwhile or not

Investment project could be the purchase of a new PC for a small firm, a new piece of equipment in a manufacturing plant, a whole new factory, etc

Investment Appraisal Types of investment

appraisal: Payback Period

Average Rate of Return (ARR)

Net Present Value (discounted cash flow)

What factors need to be considered before investing in equipment such as this?

Source: Gergely Erno, http://www.sxc.hu

Investment Appraisal Why do companies invest?

Importance of remembering investment as the purchase of productive capacity NOT buying stocks and shares or investing in a bank!

Buy equipment/machinery or build new plant to: Increase capacity (amount that can be produced)

which means: Demand can be met and this generates sales

revenue Increased efficiency and productivity

Investment Appraisal Investment therefore

assumes that the investment will yield future income streams

Investment appraisal is all about assessing these income streams against the cost of the investment

Not a precise science!

A fork lift may be an important item but what does it contribute to overall sales? How long and how much work would it have to do to repay its initial cost?

Looking at the figures…

A failing farmer wants to investigate the

financial implications of possible farm diversification.

Farm Diversification – the 3 options

Project A B C

Years Goats Poultry Fish hatchery

0 (20,000) (20,000) (10,000)

1 10,000 200 0

2 10,000 200 0

3 5,000 16,000 0

4 5,000 16,000 18,000

Payback 2 years 3 years 3 mths 3 years 7 mths

NPV * 7000 7522 4760

ARR 12.5% 15.5% 20%

So what other factors should

the farmer consider before

deciding on which project to

go with?

What other factors?State of the farming industryPrice of landInterest ratesThe economy – growing or shrinking?The farmers interests – no good doing something the family has no interest in!Competition in areaLevel of demand for each option!

Capital Budgeting

Outcomeis uncertain.

Large amounts ofmoney involved.

Investment involveslong-term commitment.

Decision may bedifficult or impossible

to reverse.

The Five Main Investment Appraisal

Criteria Methods

The Five Main Investment Appraisal

Criteria Methods

Payback Method

Payback method - length of time it takes to repay the cost of initial investment

LBS Ltd uses the payback period as its sole investment appraisal method. LBS invests ¢ ¢ 30,000 to replace its computers and this investment returns ¢ ¢ 9,000 annually for the five years. From the information above evaluate the investment using the payback. Assume that ¢ ¢ 9,000 accrues evenly throughout the year.

Payback Method

Solution Year Yearly cash flow cumulative net cash flow

¢ ¢ ¢¢0 (30,000) (30,000)1 9,000 (21,000)

2 9,000 (12,000)

3 9,000 (3,000)

4 9,000 6,000 5 9,000 15,000

Therefore 3years = 27,000 then 3000/9000 x 12 = 4

Payback period = 3 years 4months

Payback Method

Payback Period

Time period required to recover the cost of the investment from the annual cash inflow produced by the investment.

Amount investedExpected annual net cash inflow

Payback MethodThe length of time taken to repay the initial capital cost

Requires information on the revenue the investment generatesE.g. A machine costs ¢¢600,000It produces items that sell at ¢ ¢ 5 each and produces

60,000 units per year

Payback period will be ?????

2 Years Computed as;

600,000 / 300,000 = 2

Payback Method

Example

Casey Co. is considering an investment of ¢130,000 in new equipment. The new equipment is expected to last 10 years. It will have zero salvage value at the end of its useful life. The straight-line method of depreciation is used for accounting purposes. The expected annual revenues and costs of the new product that will be produced from the investment are:

Sales ¢200,000

Cost of goods sold ¢145,000Depreciation expense 13,000Selling & Admin expense 22,000

180,000Income before income tax

¢20,000Income tax expense

7,000Net Income

¢13,000

Computation of Annual Cash Inflow

Expected annual net cash inflow =Net income ¢13,000Depreciation expense 13,000

¢26,000

Cash Payback Period

130,000 / 26,000 = 5 years

**Operating Cashflow During 2009, RIT Corp. had sales of $798,456. Costs of goods

sold, administrative and selling expenses, and depreciation expenses were $565,600, $98,555, and $89,561, respectively. In addition, the company had an interest expense of $223,544 and a tax rate of 35 percent. What is the operating cash flow for 2009? Ignore any tax loss carry-back or carry-forward provisions. 

Operating Cashflow SolutionSales 798,456COGS 565,600Admin & Selling Expenses 98,555Depreciation 89,561Interest Expense 223,544Tax Rate 35%

Operating Cashflow = EBIT + Depreciation - Income Taxes

EBIT = Earnings Before Interest and Taxes

EBIT = Revenue - Operating Expenses

EBIT = Sales -COGS - Admin & Selling Expenses - Depreciation

EBIT = 44,740

Tax 15,659

Operating Cashflow = ((44,740 + 89,561 - 15,659))

118,642118,642

**Cashflow to stockholders & creditors

A. What is the cash flow to stockholders for 2009? 

B. What is the cash flow to creditors for 2009? 

M & M FoodsFinancial Statements

2008 2009

Sales 6,831 7,866

COGS 4,760 5,236

Interest 331 380

Depreciation 221 289

Cash 450 468

Account Receivables 2,214 2,650

Current Liabilities 991 2,238

Inventory 2,564 2,651

Long-term debt 3,522 2,400

Net fixed assets 5,040 5,542

Common stock 2,365 3,641

Taxes 566 716

SolutionCashflow to stockholders = Cashflow from Assets - Cashflow to Creditors

Cashflow from Assets = Operating cashflow - Net Capital Spending - change in net capital

Cashflow to creditors = Interest - Net new borrowing

Operating Cashflow = Sales -COGS - Depreciation + (Depreciation - Taxes)

Net New Borrowing = 2009 Long term debt - 2008 Long term debt

Net Capital Spending = 2009 net fixed assets - 2008 net fixed assets + 2009 Depreciation

Change in NWC = 2009(cash + A/R + inventory - Current Liabilities)

Minus

2008 (cash + A/R + Inventory - Current Liabilities)

Operating Cashflow = EBIT + Depreciation - Income Taxes

Solution cont’d

Operating Cashflow = Sales-COGS- Depreciation + Depreciation -Taxes

Net Capital Spending = 2009 net fixed assets - 2008 net fixed assets + 2009 Depreciation

Change in NWC = 2009(cash + A/R + inventory - Current Liabilities)

Minus

2008 (cash + A/R + Inventory - Current Liabilities)

Operating Cashflow 1,914

Net Capital Spending 791

Change in NWC (706)

Cashflow from Assets = Operating cashflow - Net Capital Spending - change in net capital

Cashflow from assets 1,829

Net New Borrowing = 2009 Long term debt - 2008 Long term debt

Net new borrowing (1,122)

Cashflow to creditors 1,502 Cashflow to stockholders 327

Payback Period –Uneven Cash Flows

Casey Co. wants to install a machine that costs ¢16,000 and has an 8-year useful life with zero salvage value. Annual net cash flows are:

YearAnnual Net Cash Flows

Cumulative Net Cash

Flows0 (16,000)$ (16,000)$ 1 3,000 (13,000) 2 4,000 (9,000) 3 4,000 (5,000) 4 4,000 (1,000) 5 5,000 6 3,000 7 2,000 8 2,000

YearAnnual Net Cash Flows

Cumulative Net Cash

Flows0 (16,000)$ (16,000)$ 1 3,000 (13,000) 2 4,000 (9,000) 3 4,000 (5,000) 4 4,000 (1,000) 5 5,000 6 3,000 7 2,000 8 2,000

4.2

Payback Period –Uneven Cash Flows

We recover the ¢16,000purchase price between

years 4 and 5, about4.2 years for the payback period.

Consider two projects, each with a 5-year life and each costing ¢6,000.

Project One Project TwoNet Cash Net Cash

Year Inflows Inflows

1 2,000 1,0002 2,000 1,0003 2,000 1,0004 2,000 1,0005 2,000 1,000,000

Would you invest in Project One just because it has a shorter payback

period?

Using the Payback PeriodPayback = 3 years

Payback = 5 years

Payback method

Payback could occur during a year

Can take account of this by reducing the cash inflows from the investment to days, weeks or years.

Payback Method e.g.

Cost of machine = ¢ ¢ 600,000

Annual income streams from investment = ¢ ¢ 255,000 per year

Payback is some where between …Year 2 & year 3 it will pay back – but when?

Income

Year 1 255,000

Year 2 255,000

Year 3 255,000

Payback formula

= 600,000255,000

= 2.35 years

What’s just over a 1/3 of a year?= 4 months

= 2 years and 5 months…

Payback formula

2 years = 255,000 + 255,000 = 510,000

= 2 years & some months….

600,000 - 510,000 = 90,000 still owing

255,000 = 21,25012 months

= 90,000 = 4.235 month 21,250

= 2 years and 5 months…

Average Rate of Return A comparison of the profit generated by

the investment with the cost of the investment

Average annual return or annual profit ARR = --------------------------------------------

Initial cost of investment

Average annual operating income from assetAverage amount invested in asset

Compare accounting rate of return to company’s required minimum rate of return for investments of similar risk.

The minimum return is based on the company’s cost of capital.

Average Rate of Return

Average Investment =

Original Investment + Residual Value2

For Casey, average investment = (¢130,000 + ¢0)/ 2 = ¢65,000

Accounting Rate of Return

Solution to Accounting Rate of Return Problem

Average annual operating income from assetAverage amount invested in asset

¢13,000 / ¢65,000 = 20%

Accounting Rate of Return

The decision rule is: A project is acceptable if its rate of return

is greater than management’s minimum rate of return.

The higher the rate of return for a given risk, the more attractive the investment.

Accounting Rate of Return An investment is expected to yield cash flows of ¢ ¢ 10,000 annually

for the next 5 years.

The initial cost of the investment is ¢ ¢ 20,000 Total profit therefore is: ¢ ¢ 30,000

(50,000-20,000)

Annual profit = ¢ ¢ 30,000 / 5= ¢ ¢ 6,000

ARR = 6,000/20,000 x 100= 30%

Is this a worthwhile return?Need to compare to interest rates

as well alternatives.

ARR- do you need a formula? Total revenue (over lifetime) – purchase price = total profit

Total profit / life time of product = average profit

Average profit / purchase price = ARR x 100

= ARR %

Investment Appraisal

To make a more informed decision, more sophisticated techniques need to be used.

Importance of time-value of money

Discounted Cash Flows

Considers both the estimated total cash inflows and the time value of money.

Two methods1) net present value2) internal rate of return

Purchasing power would have been lost over a year due to inflation

money could have been alternatively invested in say risk-free Government securities

Investment Appraisal

Net Present Value

NPV is today’s value of the difference between cash inflows and outflows projectedat future dates, attributable to capital investments or long-term projects

Net Present Value Takes into account the fact that money's value

change with time

How much would you need to invest today to earn x amount in x years time?

Value of money is affected by interest rates

NPV helps to take these factors into consideration

Shows you what your investment would have earned in an alternative investment regime

Net Present Value e.g. Project A costs ¢ ¢ 1,000,000 After 5 years the cash returns = ¢ ¢ 100,000 (10%)

If you had invested the ¢ ¢ 1 million into a bank offering interest at 12% the returns would be greater - You might be better off re-considering your investment!

Net Present Value The principle: How much would you have to invest now to earn

¢ ¢ 100 in 1 year’s time if the interest rate was 5%?

The amount invested would need to be: ¢ ¢ 95

Allows comparison of an investment by valuing cash payments on the project and cash receipts expected to be earned over the lifetime of the investment at the same point in time, i.e the present.

Net Present Value Future Value

PV = ----------------- (1 + i)n

Where i = interest rate n = number of years

The Present Value of ¢ ¢ 1 @ 10% in 1 year’s time is 0.9090.

If you invested 0.9090p today and the interest rate was 10% you would have ¢ ¢ 1 in a year’s time

Process referred to as: ‘Discounting Cash Flow’

Don’t need to

know this formula!!

Net Present Value Cash flow x discount factor = present value

e.g. PV of ¢ 500 in 10 years time at a rate of interest of 4.25% = 500 x .6595373 = ¢ 329.77

¢ 329.77 is what you would have to invest today at a rate of interest of 4.25% to earn ¢ 500 in 10 years time

PVs can be found through valuation tables (Always given to you in exams!)

Discounted Cash Flow An example: A firm is deciding on investing in an energy

efficiency system. Two possible systems are under investigation

1 yields quicker results in terms of energy savings than the other but the second may be more efficient later

Which should the firm invest in?

Discounted Cash Flow – System A

Year Cash Flow (£) Discount Factor (4.75%)

Present Value (£)(CF x DF)

0 - (600,000) 1.00 -(600,000)

1 +75,000 0.9546539 71,599.04

2 +100,000 0.9113641 91,136.41

3 +150,000 0.8700374 130,505.61

4 +200,000 0.8305846 166,116.92

5 +210,000 0.7929209 166,513.39

6 +150,000 0.7569650 113,544.75

Total 285,000 NPV =139,416

Watch this….

Discounted Cash Flow – System B

Year Cash Flow (£) Discount Factor (4.75%)

Present Value (£)(CF x DF)

0 - (600,000) 1.00 -(600,000)

1 +25,000 0.9546539 23,866.35

2 +75,000 0.9113641 68,352.31

3 +85,000 0.8700374 73,953.18

4 +100,000 0.8305846 83,058.46

5 +150,000 0.7929209 118,938.10

6 +450,000 0.7569650 340,634.30

Total 285,000 NPV =108,802.70

Watch this….

Discounted Cash Flow System A represents the better

investment…. But why?

System B yields the same cash return after 6 years but the NET returns of System A occur faster and are worth more to the firm than returns occurring in future years even though those returns are greater

Absolutely vital to remember this for

evaluation!

What would you prefer…a ¢ ¢ 50

today or ¢ ¢ 100 in 3 years time?

Net Present Value Method Find PV of future cash flows and compare

with capital outlay Interest rate used = required minimum

rate of return Proposal is acceptable when NPV is zero or

positive. The higher the positive NPV, the more

attractive the investment.

Net Present Value We will assume that Casey Co’s annual

cash inflows of ¢26,000 are uniform over the asset’s useful life.

The present value of the annual cash inflows can be computed by using the present value of an annuity of 1 for 10 periods. Assume the company requires a minimum return of 12%.

Net Present ValueCash Flow

When? Type of cash flow

Present value factor

Present value of

cash flows

(130,000) Now (¢130,000)

NPV

26,000 Yrs 1-10

Annuity 5.650 146,900

¢ 16,900

Analysis of the proposal: The proposed capital expenditure is acceptable at a required rate of return of 12%

because the net present value is positive

Net Present Value

When annual cash inflows are unequal, use present value of one tables.

Net Present ValueCash Flow When? Type of

cash flowPV factor Present

value

(130,000) Now ($130,000)

36,000 1 Lump sum .893 32,148

32,000 2 “ .797 25,504

29,000 3 “ .712 20,648

27,000 4 “ .636 17,172

26,000 5 “ .567 14,742

24,000 6 “ .507 12,168

23,000 7 “ .452 10,396

22,000 8 “ .404 8,888

21,000 9 “ .361 7,581

20,000 10 “ .322 6,440

NPV $25,687

,,

Internal Rate of Return Interest yield of the potential investment The interest rate that will cause the

present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows.

Internal Rate of Return STEP 1.Compute the internal rate of return

factor using this formula:

Capital InvestmentAnnual Cash Inflows

130,000 / 26,000 = 5

Internal Rate of Return Method

STEP 2. Use the factor and the present value of an annuity of 1 table to find the internal rate of return.

Locate the discount factor that is closest to 5.0 on the line for 10 periods.

Internal Rate of Return Decision CriteriaThe decision rule is: Accept when internal rate of return is equal

to or greater than the required rate of return

Reject when internal rate of return is less than required rate

Internal Rate of Return –Uneven Cash Flows If cash inflows are unequal, trial and

error solution will result if present value tablesare used.

Use business calculators and electronic spreadsheets

Profitability Index (PI) Measures the benefit per unit cost, based

on the time value of money A profitability index of 1.1 implies that for

every ¢1 of investment, we create an additional ¢0.10 in value

This measure can be very useful in situations where we have limited capital

In other words, PI shows the relative profitability of any project, or the present value per cedi of initial cost

Profitability Index (PI)

PV of future cash flows

Initial Cost

Compute the PI for a project with initial cost of ¢ 130,000 with an NPV of ¢ 16,900

Profitability Index (PI)

Initial cost = 130,000NPV = 16,900

PV of future cash flows = 146,900

Answer

146,900

130,000 = 1.13

 Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $78,000 a year for 7 years. At the beginning of the project, inventory will decrease by $19,000, accounts receivables will increase by $24,000, and accounts payable will increase by $18,000.

All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $279,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $52,000 aftertax cash flow.

At the end of the project, net working capital will return to its normal level.

What is the Net Present Value of this project given a required return of 14.5 percent?

(B) Calculate the project Profitability Index

**Net Present Value

Solution

Cashflow for initial year CF0

Initial cost (279,000)

Inventory decrease

19,000

Account Receivable increase (24,000)

Account payable increase 18,000

CF0 =

(-279,000 + 19,000 - 24,000 +18,000) (266,000)

Solution cont’d

Cashflow for year 7 CO7

Yearly cashflow 78,000

Salvaged Equipment after tax cashflow 52,000

Inventory decrease (initial year) (19,000)

Account Receivable increase (initial year) 24,000

Account payable increase (initial year) (18,000)

CO7 = (78,000 + 52,000 - 19,000 + 24,000 - 18,000) 117,000

NPV Computation Rate of return r = 14.50% ( r = 0.145) Period/Number of years = n = 7 NPV = CF0 + yearly cashflow * [1 - ((1/(1 + r)^n-1)/r) ] +[ CO7/(1 + r)^n]

Solution cont’d

NPV = (-279,000 + 78,000 * [1-1/(1+0.145)^7-1/0.145] + 117,000/(1 + 0.145)^7

78,555.24

(B)

Profitability Index, PI, is calculated as PV of future cash flows

Initial year cashflow

PV of future cash flows 78,555.24

Initial year cashflow 266,000

PI 0.2953

( C ) An investment project cost $23,500 and has annual cash flows of $6,800 for 6 years. If the discount rate is 20 percent, what is the discounted payback period? 

Solution cont’d

PV = Annual cashflow * [1-((1/(1+r)^n))/r)]

Annual cashflow 6,800

Discount rate, r 20%0.2

Period, n 6

PV = 22,613.47

Advantages and Disadvantages of Profitability Index

Advantages Closely related to

NPV, generally leading to identical decisions

Easy to understand and communicate

May be useful when available investment funds are limited

Disadvantages May lead to

incorrect decisions in comparisons of mutually exclusive investments

Payback Accounting Net present Internal rateperiod rate of return value of return

Basis of Cash Accrual Cash flows Cash flowsmeasurement flows income Profitability Profitability

Measure Number Percent Dollar Percentexpressed as of years Amount

Easy to Easy to Considers time Considers timeUnderstand Understand value of money value of money

Strengths Allows Allows Accommodates Allowscomparison comparison different risk comparisons

across projects across projects levels over of dissimilara project's life projects

Doesn't Doesn't Difficult to Doesn't reflectconsider time consider time compare varying risk

value of money value of money dissimilar levels over theLimitations projects project's life

Doesn't Doesn't giveconsider cash annual rates

flows after over the lifepayback period of a project

Comparing Methods

9-73

IRR and Mutually Exclusive Projects Mutually exclusive projects

If you choose one, you can’t choose the other Example: You could have chosen to attend

graduate school at either KNUST or GTUC (Coventry), but not both

Intuitively you would use the following decision rules: NPV – choose the project with the higher NPV IRR – choose the project with the higher IRR

Investment Appraisal Key considerations for firms in

considering use:

Ease of use/degree of simplicity required

Degree of accuracy required

Extent to which future cash flows can be measured accurately

Extent to which future interest rate movements can be factored in and predicted

Necessity of factoring in effects of inflation

Absolutely vital to also

remember this for evaluation!

**More ratio problemsUptown Men's Wear has accounts payable of $4,428,inventory of $15,900, cash of $2,526 fixed assets of $16,800,accounts receivable of $7,814, and long-term debt of $8,400.What is the value of the net working capital to total assetsratio?

SolutionCash 2,526 AR 7,814 Inventory 15,900 Fixed assets 16,800 AP 4,428 Long Term Debt 8,400

Net working capital to Total assets ratio = Net Working CapitalTotal Assets

Net working capital = Current assets - Current liabilitiesCash + AR + Inventory - Accounts payable

21,812

Total Assets = Cash + AR + Inventory + Fixed Assets 43,040

Net working capital to Total assets ratio = 0.51

**Some more ratio issues The Flower Shoppe has accounts receivable of $7,930, inventory of $7,044,

sales of $548,226, and cost of goods sold of $412,899. How many days does it take the firm to both sell its inventory and collect the payment on the sale assuming that all sales are on credit? 

Sales 548,226COGS 412,899AR 7,930Inventory 7,044

Days of the year 365

Days in inventory = 365 daysInventory Turnover ratio

Days in inventory = 6.227

Days' Sales in receivables orAverage Collection Period 365 Days

Receivables Turnover ratio

Solution cont’d

Receivables Turnover ratio SalesAccounts Receivable

Days' Sales in receivables orAverage Collection Period 5.280

Total days in Inventory and Receivables11.507

**Some even more ratios  A firm has a debt-equity ratio of 67 percent, a total asset

turnover of 1.36, and a profit margin of 9.4 percent. The total equity is $640,115. What is the amount of the net income? 

Debt - equity ratio 67%

0.67

Total assets turnover 1.36

Profit Margin 9.40%

0.049

Total Equity 640,511

Solution cont’dDuPont formula on ROE

ROE = (Profit margin)*(Asset turnover)*(Equity multiplier)

Net Income *Sales

Sales *Assets

AssetsEquity

DuPont model tells that ROE is affected by three things:

Operating efficiency, which is measured by net profit margin;

Asset use efficiency, which is measured by total asset turnover;

Financial leverage, which is measured by the equity multiplier;

If ROE is unsatisfactory, the DuPont analysis helps locate the part of the business that is underperforming.

Solution cont’dEquity Multiplier = (1 + Debt to Equity Ratio)

Debt/Equity = 0.67 Debt = Assets - Equity

Assets - Equity =Equity

0.67

Assets - Equity = 0.67 * Equity Assets = (0.67 * Equity) + Equity

Assets = 0.67Equity + Equity Assets = Equity (0.67 + 1)

Return on equity = Profit Margin * Total Assets Turnover * (1 + Debt to Equity Ratio)

(0.094 * 1.36 * (1 + 0.67) 0.1112888

Return on equity = Net IncomeTotal Equity

Net Income = Return on Equity * Total Equity

71,282

**Some more ratio issuesUse the below statements to answer question A to E

TEW COMPANY Balance Sheet

As of December 31, 2007

Assets

Cash 70,000 Accounts Receivable 100,000 Inventory 85,000 PPE, net 455,000 Total Assets 710,000

Liabilities and Stockholders' Equity

Accounts payable 95,000 Accrued expenses 116,000

Long Term Debt 195,000 Common Stock 168,000 Paid-in capital 38,000 Retained Earnings 98,000 Total Liabilities and SE 710,000

TEW COMPANY Income Statement

For the Year Ended December 31, 2007

Sales (all on credit) 800,000

COGS 500,000

Gross Profit 300,000

Sales and Admin Expenses 40,000

Fixed Lease Expense 20,000

Depreciation 80,000

Operating Profit 160,000

Interest Expense 40,000

Profit before Taxes 120,000

Taxes 35% 42,000

Net Income 78,000

(A). Refer to the figure above. The firm's return on equity is 

ROE = Net IncomeShareholders' Equity

0.26

B). Refer to the figure above. The firm's average collection period is

Average Collection Period= 365Receivable Turnover ratio

Receivable Turnover ratio Sales on AccountAccounts Receivable

8Average Collection Period= 45.625days

(C). Refer to the figure above. Tew's quick ratio is 

Quick Ratio = Current assets - InventoryCurrent Liabilities

170,000 0.806 211,000

(D). Refer to the figure above. The firm's debt to asset ratio is 

Debt to Assets ratio = Total DebtTotal Assets

406,000 710,000

0.57

(E). Refer to the figure above. Fixed Charge coverage for Tew Company is 

(E). Refer to the figure above. Fixed Charge coverage for Tew Company is 

Fixed charge coverage = Earnings before interest and taxes + fixed chargeFixed charges + Interest

160,000 60,000

2.67

Interpretation: EBIT, Taxes, and Interest Expense are taken from the company's income statement.Lease Payments are taken from the balance sheet and are usually shown as a footnote on the balance sheet.The result of the fixed charge coverage ratio is the number of times the company can cover its fixed charges per year.The higher the number, the better the debt position of the firm, similar to the times interest earned ratio.