Problem 5-8 (Algo)3Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to its product line. Thecompany is currently considering two options. The first is a small facility that it could build at a cost of $8 million. If demand for newproducts is low, the company expects to receive $9 million in discounted revenues (present value of future revenues) with the smallfacility. On the other hand, if demand is high, it expects $11 million in discounted revenues using the small facility. The second option isto build a large factory at a cost of $10 million. Were demand to be low, the company would expect $11 million in discounted revenueswith the large plant. If demand is high, the company estimates that the discounted revenues would be $15 million. In either case, theprobability of demand being high is 0.40, and the probability of it being low is 0.60. Not constructing a new factory would result in noadditional revenue being generated because the current factories cannot produce these new products.a. Calculate the NPV for the following: (Leave no cells blank - be certain to enter "0" wherever required. Enter your answers inmillions rounded to 1 decimal place.)PlansSmall facility $Do nothingLarge facilityNPV69 690.7$ 0millionmillion2.5 millionb. The best decision to help Expando isto build the small facility.to do nothing.to build the large facility.

NPV is the net present value is the difference between the present value of cash flow and initial…

Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to company is currently considering two options. The first is a small facility that it could build at a cost of $8 million. I products is low, the company expects to receive $9 million in discounted revenues (present value of future reven facility. On the other hand, if demand is high, it expects $11 million in discounted revenues using the small facility. to build a large factory at a cost of $10 million. Were demand to be low, the company would expect $11 million in with the large plant. If demand is high, the company estimates that the discounted revenues would be $15 million probability of demand being high is 0.40, and the probability of it being low is 0.60. Not constructing a new factor additional revenue being generated because the current factories cannot produce these new products. a. Calculate the NPV for the following: (Leave no cells blank - be certain to enter "0" wherever required. Enter y millions rounded to 1 decimal place.) Plans Small facility Do nothing NPV $ 0.7 million $ 0 million

Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to company is currently considering two options. The first is a small facility that it could build at a cost of $8 million. I products is low, the company expects to receive $9 million in discounted revenues (present value of future reven facility. On the other hand, if demand is high, it expects $11 million in discounted revenues using the small facility. to build a large factory at a cost of $10 million. Were demand to be low, the company would expect $11 million in with the large plant. If demand is high, the company estimates that the discounted revenues would be $15 million probability of demand being high is 0.40, and the probability of it being low is 0.60. Not constructing a new factor additional revenue being generated because the current factories cannot produce these new products. a. Calculate the NPV for the following: (Leave no cells blank - be certain to enter "0" wherever required. Enter y millions rounded to 1 decimal place.) Plans Small facility Do nothing NPV $ 0.7 million $ 0 million

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter15: Decision Analysis

Section: Chapter Questions

Problem 10P: Hemmingway, Inc. is considering a $5 million research and development (R&D) project. Profit...

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Problem 4-8 (Algo) Expando, Incorporated is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $8 million. If demand for new products is low, the company expects to receive $9 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $11 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $10 million. Were demand to be low, the company would expect $11 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $15 million. In either case, the probability of demand being high is 0.40, and the probability of it being low is 0.60. Not constructing a new factory would result in no additional revenue…
Question 9, P1-4 (book/static) Part 1 of 5 Marginal cost-benefit analysis and the goal of the firm Wendy Winter needs to determine whether the current warehouse system should be upgraded to a new system. The new system would require an initial cash outlay of $250,000. The current system could be sold for $55,000. The monetary benefit of the new system over the next five years is $325,000, while the monetary benefit of the current system over the same period is $125,000. Furthermore, it is expected that the firm's stock price will increase if the new system is implemented because it will make the firm more cost efficient and cost effective in the long run. a. Identify and describe the analysis Wendy should use to make the decision. b. Calculate the marginal benefit of the proposed new warehouse system. c. Calculate the marginal cost of the proposed new warehouse system. d. What should Wendy's recommendation to the firm be regarding the new warehouse system? Explain your recommendation.…
be ignored. 13. Project NPV United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is S100,000, and thereafter the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.2 million. This could be depreciated for tax purposes over 10 years. However, Pigpen expects to terminate the project at the end of eight years and to resell the plant and equipment in year 8 for $400,000. Finally, the project requires an initial investment in working capital of S350,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year I sales of hog feed are expected to be $4.2 million, and thereafter sales are forecasted to grow by 5% a year, slightly faster than the inflation rate.…
Question 2 : ABC CO. is considering replacing a production line with a new, more productive one. You are given the information that follows. The existing production line currently generates $100,000 profit per year and could be sold today for $40,000. The new proposed production line would generate profits of $150,000 per year The new proposed production line requires an initial investment $80,000. The company is seeking your advice regarding whether to replace the production line or keep the existing one. Required: Based on the Marginal analysis concept, what would you recommend? State the reasons why focusing on profit only should not be the optimal goal for companies.
Quantitative Problem: Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new line of high-protein energy smoothies. SSC's CFO has collected the following information regarding the proposed project, which is expected to last 3 years: The project can be operated at the company's Charleston plant, which is currently vacant. The project will require that the company spend $3.5 million today (t = 0) to purchase additional equipment. For tax purposes the equipment will be depreciated on a straight-line basis over 5 years. Thus, the firm's annual depreciation expense is $3,500,000/5 = $700,000. The company plans to use the equipment for all 3 years of the project. At t = 3 (which is the project's last year of operation), the equipment is expected to be sold for $1,600,000 before taxes. The project will require an increase in net operating working capital of $730,000 at t = 0. The cost of the working capital will be fully recovered…
Quantitative Problem: Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new line of high-protein energy smoothies. SSC's CFO has collected the following information regarding the proposed project, which is expected to last 3 years: The project can be operated at the company's Charleston plant, which is currently vacant. The project will require that the company spend $3.5 million today (t = 0) to purchase additional equipment. For tax purposes the equipment will be depreciated on a straight-line basis over 5 years. Thus, the firm's annual depreciation expense is $3,500,000/5 = $700,000. The company plans to use the equipment for all 3 years of the project. At t = 3 (which is the project's last year of operation), the equipment is expected to be sold for $1,600,000 before taxes. The project will require an increase in net operating working capital of $730,000 at t = 0. The cost of the working capital will be fully recovered…
The J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The companys president must determine whether to make the expansion a medium- or large-scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are 0.20, 0.50, and 0.30, respectively. Letting x and y indicate the annual profit in thousands of dollars, the firms planners developed the following profit forecasts for the medium-and large-scale expansion projects. a. Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit? b. Compute the variance for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of minimizing the risk or uncertainty?
Hemmingway, Inc. is considering a $5 million research and development (R&D) project. Profit projections appear promising, but Hemmingway’s president is concerned because the probability that the R&D project will be successful is only 0.50. Furthermore, the president knows that even if the project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product. If the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized. Another option is that if the R&D project is successful, the company could sell the rights to the product for an estimated $25 million. Under this option, the company would not build the $20 million production facility. The decision tree follows. The profit projection for each outcome is shown at the end of the branches. For example, the revenue projection for the high demand outcome is $59 million. However, the cost of the R&D project ($5 million) and the cost of the production facility ($20 million) show the profit of this outcome to be $59 – $5 – $20 = $34 million. Branch probabilities are also shown for the chance events. Analyze the decision tree to determine whether the company should undertake the R&D project. If it does, and if the R&D project is successful, what should the company do? What is the expected value of your strategy? What must the selling price be for the company to consider selling the rights to the product? Develop a risk profile for the optimal strategy.
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Talbot Industries is considering launching a new product. The new manufacturing equipment will cost 17 million, and production and sales will require an initial 5 million investment in net operating working capital. The companys tax rate is 40%. a. What is the initial investment outlay? b. The company spent and expensed 150,000 on research related to the new product last year. Would this change your answer? Explain. c. Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for 1.5 million after taxes and real estate commissions. How would this affect your answer?
Flanders Manufacturing is considering purchasing a new machine that will reduce variable costs per part produced by $0.15. The machine will increase fixed costs by $18,250 per year. The information they will use to consider these changes is shown here.