Beacon Company is considering automating its production facility. The initial investment in automation would be $10.31 million, and the equipment has a useful life of 8 years with a residual value of $1,030,000. The company will use straight- line depreciation. Beacon could expect a production increase of 43,000 units per year and a reduction of 20 percent in the labor cost per unit. Current (no automation) 82,000 units Proposed (automation) 125,000 units Production and sales volume Per Unit Per Total Unit Total Sales revenue $ 96 $ ? $ 96 $ ? Variable costs Direct materials $ 16 $ 16 Direct labor 15 ? Variable manufacturing 9 9 overhead Total variable manufacturing costs 40 ? Contribution margin $ 56 ? $ 59 ? Fixed manufacturing costs $ 1,240,000 $ 2,330,000 Net operating income ? ? 5. Recalculate the NPV using a 10 percent discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Presen Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign. Enter the answer in whole dollars.) Net present value

Beacon Company is considering automating its production facility. The initial investment in automation would be $10.31 million, and the equipment has a useful life of 8 years with a residual value of $1,030,000. The company will use straight- line depreciation. Beacon could expect a production increase of 43,000 units per year and a reduction of 20 percent in the labor cost per unit. Current (no automation) 82,000 units Proposed (automation) 125,000 units Production and sales volume Per Unit Per Total Unit Total Sales revenue $ 96 $ ? $ 96 $ ? Variable costs Direct materials $ 16 $ 16 Direct labor 15 ? Variable manufacturing 9 9 overhead Total variable manufacturing costs 40 ? Contribution margin $ 56 ? $ 59 ? Fixed manufacturing costs $ 1,240,000 $ 2,330,000 Net operating income ? ? 5. Recalculate the NPV using a 10 percent discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Presen Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign. Enter the answer in whole dollars.) Net present value

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A company is considering replacing an old piece of machinery, which cost $600,000and has $350,000 of accumulated depreciation to date, with a new machine that has apurchase price of $545,000. The old machine could be sold for $231,000. The annualvariable production costs associated with the old machine are estimated to be $61,000per year for eight years. The annual variable production costs for the new machine areestimated to be $19,000 per year for eight years. a.) Prepare and show in solution a differential analysis dated September 13 on whetherto continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). b.) What is the sunk cost in the scenario?
Consider the following project of Hand Clapper, Incorporated. The company is considering a four-year project to manufacture clap-command garage door openers. This project requires an initial investment of $14 million that will be depreciated straight- line to zero over the project's life. An initial investment in net working capital of $590,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $11.6 million in pretax revenues with $4.4 million in total pretax operating costs. The tax rate is 21 percent and the discount rate is 11 percent. The market value of the equipment over the life of the project is as follows: Year Market Value (millions) a. 1 $ 11.2 9.1 234 4.9 1.3 Assuming the company operates this project for four years, what is the NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) b-1. Compute…
Urmila
Beacon Company is considering automating its production facility. The initial investment in automation would be $9.15 million, and the equipment has a useful life of 7 years with a residual value of $1,100,000. The company will use straight- line depreciation. Beacon could expect a production increase of 49,000 units per year and a reduction of 20 percent in the labor cost per unit. Current (no automation) Proposed (automation) 77,000 units126,000 units Production and sales volumePer UnitTotalPer UnitTotal Sales revenue$97$ ?$97$? Variable costs Direct materials$15 $15 Direct labor 20? Variable manufacturing overhead 10 10 Total variable manufacturing costs 45 ? Contribution margin$52?$56? Fixed manufacturing costs $ 1,130,000 $2,230,000 Net operating income ?? 3. Determine the project's payback period. (Round your answer to 2 decimal places.)
Baghiben
You are evaluating a product for your company. You estimate the sales price of product to be $150 per unit and sales volume to be 10,500 units in year 1; 25,500 units in year 2; and 5,500 units in year 3. The project has a 3 year life. Variable costs amount to $75 per unit and fixed costs are $205,000 per year. The project requires an initial investment of $339,000 in assets which will be depreciated straight-line to zero over the 3 year project life. The actual market value of these assets at the end of year 3 is expected to be $45,000. NWC requirements at the beginning of each year will be approximately 15% of the projected sales during the coming year. The tax rate is 21% and the required return on the project is 12%. What will the year 2 free cash flow for this project be?
Gemstones Inc. is considering a new production line. The expected economic life of the project is 6 years. The project will generate sales and incur costs annually. Variable cost is 52% of sales. Total annual fixed costs, excluding depreciation, are $353,000. The initial outlay of the project is $1,010,000 and will be depreciated on a straight-line basis to zero at the end of the project. The company's tax rate is 30% and the discount rate is 10.00%. Calculate the NPV break-even level of sales. (Assume that the half-year rule does not apply.) a. $1,425,606 b. $2,241,776 c. $1,575,903 d. $1,275,308 e. $3,103,472
Rey
Cori's Meats is looking at a new sausage system with an installed cost of $435,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $61,000. The sausage system will save the firm $255,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $20,000. If the tax rate is 24 percent and the discount rate is 9 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV
Glow Limited is considering expanding its production capacity with the installation of newequipment that will cost $950 000. This equipment is expected to have a useful life of 8 years,when it will be disposed of at a scrap value of $25 000.Import duties on the equipment would amount to 2% of purchase price. Installation and testingcosts would be $15 000. To support the expanded capacity, net working capital would have to beincreased by $29 000. The new equipment would result in annual net operating cash inflows of$300 000.Glow Limited’s cost of capital is 16% and the tax rate is 25%.A. Compute initial, annual and terminal after-tax cash flows. B. Use the NPV method to advise Happy Limited on the effect that installing the new equipment will have on the value of the firm.
We assume that the company that you selected is considering a new project. The project has 8 years’ life. This project requires an initial investment of $580 million to purchase equipment, and $30 million for shipping & installation fees. The fixed assets fall in the 7-year MACRS class. The salvage value of the fixed assets is 10% of the purchase price (including the shipping & installation fee). The number of units of the new product expected to be sold in the first year is 2,660,000 and the expected annual growth rate is 10.5%. The sales price is $280 per unit and the variable cost is $225 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 3.0%. The required net operating working capital (NOWC) is 11.8% of sales with the corporate tax rate of 21%. The project is assumed to have the same risk as the corporation, so 5.35% is the discount rate for this hypothetical project. Estimate annual cash flows for the 8…
Beacon Company is considering automating its production facility. The initial investment in automation would be $9.23 million, and the equipment has a useful life of 8 years with a residual value of $1,070,000. The company will use straight-line depreciation. Beacon could expect a production increase of 40,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Current (no automation) 80,000 units Proposed (automation) 120,000 units Per Unit Total Per Unit Total Sales revenue $ 91 $ ? $ 91 $ ? Variable costs Direct materials $ 17 $ 17 Direct labor 30? Variable manufacturing overhead 9 9 Total variable manufacturing costs 56? Contribution margin $ 35 ? $ 41 ? Fixed manufacturing costs 1,140,000 2,260,000 Net operating income ? ? Required: 3. Determine the project's payback period.

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