Managerial Accounting
Managerial Accounting
15th Edition
ISBN: 9781337912020
Author: Carl Warren, Ph.d. Cma William B. Tayler
Publisher: South-Western College Pub
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estion 3 Using relevant data provided about the Antibacterial
Soap Project below, prepare a cash flow table, using the Excel
formulas as explained in 6.2 Asset replacement and calculate
the NPV. IRR, PVI, and discounted payback period. AB -
CLEAN Ltd is planning to invest in a new antibacterial soap (
AB99) project that requires equipment with a purchase price
of $96,000. The installation cost of $5,000 for the soap-
producing equipment would be paid by the supplier. The
transportation cost for the equipment would be $4,000. The
machine will have an economic life of six years and would be
depreciated at 14 percent straight line for the tax purpose. The
salvage value of the equipment is estimated to be $16,000 at
the end of the project life. Starting production with this
machine requires an additional investment of $32,000 in
inventory and $13,000 in accounts receivable. Whereas, there
would be additional accounts payable of $24,000. In order to
analyse the effectiveness of the AB99 soap to kill germs, the
management has spent $12,000 for clinical tests. The tests
revealed that the AB99 soap uses harmful chemicals (
triclosan and triclorcarbon) as the main ingredients and
these can be linked to health hazards and environmental
damage. Despite the adverse outcomes of the tests, the
management has decided to go for production. Expected
sales in the first year would be $98,000. Sales are expected
to grow at 21% in each year until the 6th year. Costs have
been estimated to be 42 percent of sales revenue. In addition,
there would be an annual fixed overhead cost of $7,848. If
the project is started, the regular annual net earnings of $
7,000 of the company from the same production facility
would be stopped. This new project will increase the annual
interest expense from $7,000 to $9, 200. Whereas, due to the
start of the project, annual sales of the company's body wash
will increase by $16,000 in the first year and that increased
sales will further grow by 13 percent in each year until the 6th
year. The cost of sale for the body wash products is 40
percent. The applicable corporate tax rate would be 34
percent. The cost of capital is estimated to be either 10.83
percent or 15.37 percent. The management has targeted a
discounted payback period of four years. What would be your
decision about this project at 10.83 and 15.37 percent costs of
capital? What would be your comment in recommending this
project considering qualitative factors?
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Transcribed Image Text:estion 3 Using relevant data provided about the Antibacterial Soap Project below, prepare a cash flow table, using the Excel formulas as explained in 6.2 Asset replacement and calculate the NPV. IRR, PVI, and discounted payback period. AB - CLEAN Ltd is planning to invest in a new antibacterial soap ( AB99) project that requires equipment with a purchase price of $96,000. The installation cost of $5,000 for the soap- producing equipment would be paid by the supplier. The transportation cost for the equipment would be $4,000. The machine will have an economic life of six years and would be depreciated at 14 percent straight line for the tax purpose. The salvage value of the equipment is estimated to be $16,000 at the end of the project life. Starting production with this machine requires an additional investment of $32,000 in inventory and $13,000 in accounts receivable. Whereas, there would be additional accounts payable of $24,000. In order to analyse the effectiveness of the AB99 soap to kill germs, the management has spent $12,000 for clinical tests. The tests revealed that the AB99 soap uses harmful chemicals ( triclosan and triclorcarbon) as the main ingredients and these can be linked to health hazards and environmental damage. Despite the adverse outcomes of the tests, the management has decided to go for production. Expected sales in the first year would be $98,000. Sales are expected to grow at 21% in each year until the 6th year. Costs have been estimated to be 42 percent of sales revenue. In addition, there would be an annual fixed overhead cost of $7,848. If the project is started, the regular annual net earnings of $ 7,000 of the company from the same production facility would be stopped. This new project will increase the annual interest expense from $7,000 to $9, 200. Whereas, due to the start of the project, annual sales of the company's body wash will increase by $16,000 in the first year and that increased sales will further grow by 13 percent in each year until the 6th year. The cost of sale for the body wash products is 40 percent. The applicable corporate tax rate would be 34 percent. The cost of capital is estimated to be either 10.83 percent or 15.37 percent. The management has targeted a discounted payback period of four years. What would be your decision about this project at 10.83 and 15.37 percent costs of capital? What would be your comment in recommending this project considering qualitative factors?
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