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Concept explainers
Instructions
An evaluation is needed for a sock production project that requires an initial investment of $50,000,000°, of which 80% corresponds to
1. Build the project's cash flow.
2. Calculate the
3. Indicate the control method you would establish to monitor the project and justify its implementation.
4. Mention the type of indicators you would use to evaluate the project's performance, providing reasons for your choices.
5. Indicate an organizational strategy you would implement during the project execution, explaining why it would contribute to a successful conclusion.
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- Calculating EAC You are evaluating two different silicon wafer milling machines. The Techron I costs $265,000, has a 3-year life, and has pretax operating costs of $41,000 per year. The Techron II costs $330,000, has a 5-year life, and has pretax operating costs of $52,000 per year. For both milling machines, use straight-line depreciation to zero over the project’s life and assume a salvage value of $25,000. If your tax rate is 21 percent and your discount rate is 9 percent, compute the EAC for both machines. Which do you prefer? Why?arrow_forwardThe equipment will require an investment of $120,000 and an operating horizon of 7 years is estimated that integrates the life cycle of the technology and its products. As a pre-evaluation process, a market investigation was developed, which yielded an estimate of $70,000 as annual income, as well as a technical study of the operation and productivity of the production process of these devices, where a sizing of annual expenses was determined. of $45,000. Both amounts are assumed constant during the duration of the project. The company considers that if the equipment is acquired, it can be liquidated in 7 years at a net price of $40,000. The project leader sets a return of 12% per year to accept this investment, as this return is the common level for similar projects in the organization. What decision should this company make? Income 0 Expenses Investment 120000 salvage value 1 70000 45000 -120000 25000 2 70000 45000 25000 3 70000 45000 25000 70000 45000 25000 5 70000 45000 25000 6…arrow_forwardPivot, Inc. is currently valuing a new project that has the average risk of its investment projects. The project requires upfront R&D and marketing expenses of $10 million and a $30 million investment in equipment. The equipment will be obsolete in 3 years and will be depreciated using the straight-line method over that period. For each year over the next 3 years, the project offers annual sales of $100 million, has annual manufacturing costs of $30 million, and annual operating expenses of $10 million. Further, the project requires no net working capital in year 0, and $2.0 million in net working capital in each year from year 1 to year 2 and no net working capital in year 3. Beyond year 3, the project's free cash flows are expected to growth at an annual rate of 1%. Pivot currently has 20 million outstanding shares with its stock price of $30 per share, $320 million in debt, $20 million in excess cash, the cost of debt of 5%, and the cost of equity of 10%, and the corporate tax rate…arrow_forward
- A project with a life of 10 has an initial fixed asset investment of $25,620, an initial NWC investment of $2,440, and an annual OCF of −$39,040. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return is 10 percent, what is the project's equivalent annual cost, or EAC? Show equations using excel.arrow_forwardDivyaarrow_forwardWinthrop Company has an opportunity to manufacture and sell a new product for a five-year period. To pursue this opportunity, the company would need to purchase a plece of equipment for $130,000. The equipment would have a useful life of five years and a $10,000 salvage value. The CCA rate for the equipment is 30%. After careful study. Winthrop estimated the following annual costs and revenues for the new product: Sales revenues: Variable expenses Fixed expenses $250,000 $130,000 $ 70,000 The company's tax rate is 30% and its after-tax cost of capital is 10%. Required: 1. Compute the net present value of the project. (Hint Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and PV factor. Round the final answers to the nearest whole dollar. Negative value should be indicated with minus sign.) 2. Would you recommend that the project be undertaken? 1. Net present value 2 Would you recommend that the project be undertaken?arrow_forward
- Information for two alternative projects involving machinery investments follows. Project 1 requires an initial investment of $130,900. Project 2 requires an initial investment of $97,200. Assume the company requires a 10% rate of return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Annual Amounts Sales of new product Expenses Materials, labor, and overhead (except depreciation) Depreciation-Machinery Selling, general, and administrative expenses Income Project 1 Years 1-7 Initial investment Net present value Compute the net present value of each potential investment. Use 7 years for Project 1 and 5 years for Project 2. (Negative net present values should be indicated with a minus sign. Round your present value factor to 4 decimals. Round your answers to the nearest whole dollar.) Net Cash Flows X Answer is complete but not entirely correct. Present Value of Annuity at 10% 26,460 X Project 1 $ 105,300 X 70,200…arrow_forwardA process for producing the mosquito repellant Deet has an initial investment of $210,000 with annual costs of $52,000. Income is expected to be $90,000 per year. What is the payback period at i = 0% per year? At i = 12% per year?arrow_forwardBad Company has a new 4-year project that will have annual sales of 8,400 units. The price per unit is $19.90 and the variable cost per unit is $7.65. The project will require fixed assets of $94,000, which will be depreciated on a 3-year MACRS schedule. The annual depreciation percentages are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. Fixed costs are $34,000 per year and the tax rate is 25 percent. What is the operating cash flow for Year 3? $20,705 $80,655 $57,550 $55,155 $60,744arrow_forward
- Please show workarrow_forwardA marketing company intends to 0 distribute a new product. It is expected to produce net returns of $17,000 per year for the first four yoars and $13,000 per year for the following throe yoars Tha faciltios roquirodto distribute the product will cost $70,000 with a disposal value of $9,000 after seven years. The facilities will require a major facelift costing $10,000 each after three years and after five years. If the companyrequires a return on investment of 10%, should the company distribute the new product?arrow_forwardcure Rex Industries plans to expand its product line. The project requires an initial investment of $285,000 to purchase new equipment. The project is expected to generate the following annual revenues and expenses each year during its 9-year life: . Sales revenues Variable costs Contribution margin Fixed costs: - Salary expense - Rent expense Depreciation expense O 4.4 years O 4.6 years O 8.4 years $31,000 39,000 30,000 O 8.9 years O None of the above $170,000 (38,000) $132,000 Operating income The only non-cash item of income or expense is depreciation expense. The salvage value of the equipment at the end of the 9 years is $15,000. What is the payback period of this project in years? Round to one decimal point. (100,000) $32,000 PQarrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
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