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Gibson Mfg., Inc. is considering the introduction of a new product. Company management has prepared the following estimates related to the project as well as the related range of values, where applicable. The project under consideration has a five-year life and initial costs of $15,000. Assume the tax rate is 34 percent, there is no salvage value, and the project requires a 12 percent
a)$2.4
b)$3.8
c)$4.0
d)$5.6
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- Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is 2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Required: 1. Compute the projects payback period. 2. Compute the projects accounting rate of return. 3. Compute the projects net present value, assuming a required rate of return of 10 percent. 4. Compute the projects internal rate of return.Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
- 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 company’s tax rate is 25%. What is the initial investment outlay? The company spent and expensed $150,000 on research related to the new product last year. What is the initial investment outlay? 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. What is the initial investment outlay?We are considering the introduction of new product. Currently we are in the 27% tax bracket with a 10% discount rate. The project is expected to last five years and then, it will be terminated. The following information describes the new project: Cost of new plant and equipment RM 8,900,000 Shipping and installation costs RM 400,000 Unit Sales: Year Units Sold 1 70,000 2 120,000 3 140,000 4 80,000 5 60,000 Sales price per unit: RM300/unit in Years 1-4 and RM260/unit in Year 5 Variable cost per unit: RM180/unit Annual fixed costs: RM300,000 per year Working capital requirements: There will be an initial working capital requirement of RM100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10% of the dollar value of sales for that year. Thus, the investment in working capital will increase during Years 1 through 3, then…You are considering an investment project with the following financial information: Required investment = $500,000 Project life = 5 years Salvage value = $50,000 Depreciation method = straight-line deprecation (no half-year convention) Unit price = $40 Unit variable cost = $18 Fixed annual cost = $230,000 Annual sales volume = 100,000 units Tax rate = 35% MARR = 15% The company is concerned about the price estimate they have used to calculate the rate of return. Using sensitivity analysis, how much can the price vary to still break-even? The company believes that their estimates for unit price, demand, variable cost, fixed cost, and salvage value are accurate to +/- 10%. Using scenario analysis compare the base case to the best-case and worst-case scenarios.
- ces We are evaluating a project that costs $2,160,000, has a 8-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 90,900 units per year. Price per unit is $38.91, variable cost per unit is $24.00, and fixed costs are $863,000 per year. The tax rate is 21 percent and we require a return of 11 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Best-case NPV Worst-case NPVCookies R Us Incorporated is evaluating a new cookie cutting machine that will cost $500,000. The machine can be depreciated on a straight-line basis to zero over 10 years. It will provide the company with annual before-tax savings of $135,000. The marginal corporate tax rate is 40% and the required rate of return is 15%. What is the net present value of this cost-cutting asset? Multiple Choice $128,611.12 $157,458.69 -$193,855.11 $6,895.63 $277,909.14The Carter Corporation, a firm in the 25% marginal tax bracket, with a 15% required rate of return or discount rate, is considering a new project. This project involves the introduction of a new product. This product is expected to last 5 years and then, because it is somewhat of a fad product, it will be terminated. Cost of new plant and equipment:$380,000,000 Shipping and installation costs: 20,000,000 Unit sales: YearUnits Sold 1 2,000,000 2 2,000,000 3 2,000,000 4 1,500,000 5 1,500,000 Sales price per unit: $800/unit in years 1-3 and $600/unit in years 4 and 5 Variable cost per unit: $400/unit throughout the five years Annual fixed costs: $250,000,000 There will be an initial working capital requirement of $2,000,000 just to get production started. At the conclusion of the project, the plant and equipment can be sold for $100,000,000. The plant and equipment will be depreciated over five years on a straight-line basis to a zero-salvage value. Required: a)…
- The Carter Corporation, a firm in the 25% marginal tax bracket, with a 15% required rate of return or discount rate, is considering a new project. This project involves the introduction of a new product. This product is expected to last 5 years and then, because it is somewhat of a fad product, it will be terminated. Cost of new plant and equipment: $380,000,000 Shipping and installation costs: 20,000,000 Unit sales: Year Units Sold 1 2,000,000 2. 2,000,000 3. 2,000,000 4. 1,500,000 5. 1,500,000 Sales price per unit: $800/unit in years 1-3 and $600/unit in years 4 and 5 Variable cost per unit: $400/unit throughout the five years Annual fixed costs: $250,000,000 There will be an initial working capital requirement of $2,000,000 just to get production started. At the conclusion of the project, the plant and equipment can be sold for…Consider a project with a 3-year life. The initial cost to set up the project is $100,000. This amount is to be linearly depreciated to zero over the life of the project and there is no salvage value. The required return is 16% and the tax rate is 34%. You've collected the following estimates: Base case Pessimistic Optimistic Unit sales per year (Q) 7,000 5,000 9,000 Price per unit (P) 50 40 60 Variable cost per unit (VC) 20 35 15 Fixed costs per year ( FC) 30,000 50,000 20,000 What is the annual cash flow from assets in the base case? What is the NPV in the base case? What is the NPV in the pessimistic case? What is the NPV in the optimistic case?Magellen Industries is analyzing a new project. The data they have gathered to date is as follows: Sales quantity Sales price per unit Variable cost per unit Fixed cost Multiple Choice O Initial requirement for equipment: $120,000 Depreciation: Straight-line to zero over the four-year life of the project with no salvage value. Required rate of return: 15% Marginal tax rate: 35% What is the degree of operating leverage under the worst-case scenario? O O O .93 1.07 1.93 2.07 Lower Bound 9500 $9.75 $4.80 $15,000.00 1.63 Expected Value 10000 $10.00 $5.20 $18,000.00 Upper Bound 10500 $10.25 $5.60 $21,000.00
