Venture Capital and the Entrepreneur

Assignment #1 (ENTR 3P96)
A) Chapter 4, Exercise 3
Assume you have developed and tested a prototype electronic product and are about to start your
new business. You purchase pre-programmed computer chips at $70 per unit. Other component
costs include: plastic casings at $15 per unit and assembly hardware at $5 per unit. Direct labor
costs are $15 per hour and three units can be produced per hour. You intend to sell each unit at a
50 percent mark-up over the total costs of producing each unit. The plan is to produce 500
product units per month in January, February, and March. Sales are expected to be: 200 units in
January, 400 units in February, and 800 units in March.
A* Calculate the dollar amount of sales revenue expected in each month (i.e., January, February,
and March) and for the first quarter of the year.
B* Prepare a cost of production schedule for January, February, and March.
C* Prepare a cost of goods sold schedule for each of the three months and for the first quarter of
the year. Using your cost of goods sold estimates and the sales revenues expected in Part A,
calculate the gross earnings for January, February, and March, as well as for the first quarter of
the year.
D* Prepare an inventories schedule for January, February, and March.
B) Chapter 4, Exercise 8
Salza Technology Corporation increased its sales from $375,000 in 2018 to $450,000 in year
2019 as is shown in the firm’s income statements presented below. LeAnn Sands, chief
executive officer (CEO) and founder of the firm expressed concern that the cash account and the
firm’s marketable securities declined substantially between 2018 and 2019. Salza’s complete
balance sheets are also shown below. Ms. Sands is seeking your assistance in the preparation of
a statement of cash flows for Salza Technology.
SALZA TECHNOLOGY CORPORATION
Annual Income Statements (in $ Thousands)
2018 2019
Net sales $375 $450
Less: Cost of goods sold 225 270
Gross profit 150 180
Less: Operating expenses 46 46
Less: Depreciation 25 30
Less: Interest 4 4
Income before taxes 75 100
Less: Income taxes 20 30
Net income 55 70
Cash dividends $17 $20

Balance Sheets as of December 31 (in $ Thousands)
2018 2019
Cash $ 39 $ 16
Accounts receivable 50 80
Inventories 151 204
Total current assets 240 300
Gross fixed assets 200 290
Less accumulated depreciation -95 -125
Net fixed assets 105 165
Total assets $345 $465
Accounts payable $ 30 $ 45
Bank loan 20 27
Accrued liabilities 10 23
Total current liabilities 60 95
Long-term debt 15 15
Common stock 85 120
Retained earnings 185 235
Total liabilities and equity $345 $465
A. Prepare a statement of cash flows for 2019 for the Salza Technology Corporation.
B. Provide a brief description of what happened in terms of cash flows (both inflows and
outflows) for Salza between years 2018 and 2019.
C. Use your calculations from Part A for cash flows from operating and investing
activities to indicate the extent to which Salza was building or burning cash in 2019.
D. Convert the 2019 annual cash build or cash burn to a monthly rate. If cash flow
activities relating to operations and investing for 2019 continue into 2020, indicate:
(1) how long it will be before Salza runs out of cash (if Salza is burning cash), or (2)
the expected 2020 year-end cash account balance if Salza is building cash. Assume
no changes in cash flows from financing activities in 2020 for calculation purposes.
C) Chapter 4, Exercise 9

LeAnn Sands wants to conduct operating breakeven analyses of the Salza Technology
Corporation for 2019. Income statement information is shown in Problem 8 above. For 2019,
the firm’s cost of goods sold is considered to be variable costs and operating expenses are
considered to be fixed cash costs. Depreciation expenses in year 2019 also are expected to be
fixed costs. Calculate Salza’s EBDAT breakeven in terms of survival revenues for year 2019.
D) Chapter 4, Exercise 10

LeAnn Sands has reason to believe that year 2020 will be a replication of year 2019 except that
cost of goods sold are expected to be 65 percent of the estimated $450,000 in revenues. Other
income statement relationships are expected to remain the same in year 2020 as they were in
year 2019. Calculate the EBDAT breakeven point for 2020 for Salza in terms of survival
revenues.

E) Appendix, Exercise 2
Refer to Problems 9 and 10 (see above) involving the Salza Technology Corporation (see
Problem 8 for the firm’s financial statements).
A. Calculate Salza’s NOPAT breakeven in terms of NOPAT breakeven revenues for year 2019.
B. Calculate the NOPAT breakeven point for 2020 for Salza in terms of NOPAT breakeven
revenues.