ABC Manufacturing expects to sell 1,025 units of product in 2022 at an average price of $100,000 each based on current demand. The Chief Marketing Officer forecasts growth of 50 units per year through 2026. So, the demand will be 1,025 units in 2022, 1,075 units in 2023, etc. and the $100,000 price will remain consistent for all five years of the investment life. However, ABC cannot produce more than 1,000 units annually based on current capacity.             In order to meet demand, ABC must either update the current plant or replace it. If the plant is replaced, an initial working capital investment of $6,000,000 is required and these funds will be released at the end of the investment life to be used elsewhere.       The following table summarizes the projected data for both options:                       Update   Replace Initial investment in 2022       $    125,000,000   $    130,000,000 Terminal salvage value in 2026       $        8,000,000   $                     -   Working capital investment required     $                     -     $        6,000,000 Useful life         5 years   5 years Total annual cash operating costs per unit     $             64,000   $             63,000 The investment will be made at the beginning of 2022 and all transactions after that are assumed to occur on the last day of each year. ABC's required rate of return is 16%.   3. Calculate the project profitability index (PPI) for both the update and replace alternatives.

Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.4 million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years for $682,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year's forecast sales. The firm estimates production costs equal to $1.30 per trap and believes that the traps can be sold for $5 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 40%, and the required rate of return on the project is 8%. Year: Sales (millions of traps) 0 0 Increase in NPV 1 0.5 million 2 0.7 3 0.8 4 0.8 5 0.7 6 0.5 Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV? Note: Do not round your intermediate…

Evergreen Company is investigating the feasibility of buying a new production line producing a new product. They project unit sales as in the below table, and they project price per unit to be $120 per unit at the beginning. And when competition catches up after 3 years (in the 4th year), they anticipate that the price would drop to $110. This project requires $20,000 in net working capital at the beginning. Subsequently, total net working capital at the end of each year would be about 15% of total sales for that year. The variable cost per unit is $60, and total fixed costs are $25,000 per year. It costs about $900,000 to buy the equipment necessary to begin the production. This investment is primarily in industrial equipment and falls in Class 8 with a CCA rate of 20%. The equipment will actually be worth about $150,000 in eight years. The relevant tax rate is 40% and the required return is 15%. Years     Unit Sales  1                3000 2                5000 3                6000 4…

Database Systems is considering expansion into a new product line. Assets to support expansion will cost $740,000. It is estimated that Database can generate $1,910,000 in annual sales, with a 4 percent profit margin. What would net income and return on assets (investment) be for the year?