J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $6,200, including a set of eight chairs. The company feels that sales will be 1,900, 2,050, 2,600, 2,450, and 2,200 sets per year for the next five years, respectively. Variable costs will amount to 40 percent of sales and fixed costs are $1,810,000 per year. The new tables will require inventory amounting to 6 percent of sales, produced and stockpiled in the year prior to sales. It is believed that the addition of the new table will cause a loss of 200 tables per year of the oak tables the company produces. These tables sell for $3,500 and have variable costs of 35 percent of sales. The inventory for this oak table is also 6 percent of sales. The sales of the oak table will continue indefinitely. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $19,000,000. However, the excess production capacity means the company can produce the new table without buying the new equipment. The company controller has said that the current excess capacity will end in two years with current production. This means that if the company uses the current excess capacity for the new table, it will be forced to spend the $19,000,000 in two years to accommodate the increased sales of its current products. In five years, the new equipment will have a market value of $3,200,000 if purchased today, and $7,900,000 if purchased in two years. The equipment is depreciated on a seven-year MACRS schedule. The company has a tax rate of 21 percent and the required return for the project is 8 percent. MACRS schedule Calculate the NPV of new project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) NPV
J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $6,200, including a set of eight chairs. The company feels that sales will be 1,900, 2,050, 2,600, 2,450, and 2,200 sets per year for the next five years, respectively. Variable costs will amount to 40 percent of sales and fixed costs are $1,810,000 per year. The new tables will require inventory amounting to 6 percent of sales, produced and stockpiled in the year prior to sales. It is believed that the addition of the new table will cause a loss of 200 tables per year of the oak tables the company produces. These tables sell for $3,500 and have variable costs of 35 percent of sales. The inventory for this oak table is also 6 percent of sales. The sales of the oak table will continue indefinitely. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $19,000,000. However, the excess production capacity means the company can produce the new table without buying the new equipment. The company controller has said that the current excess capacity will end in two years with current production. This means that if the company uses the current excess capacity for the new table, it will be forced to spend the $19,000,000 in two years to accommodate the increased sales of its current products. In five years, the new equipment will have a market value of $3,200,000 if purchased today, and $7,900,000 if purchased in two years. The equipment is depreciated on a seven-year MACRS schedule. The company has a tax rate of 21 percent and the required return for the project is 8 percent. MACRS schedule Calculate the NPV of new project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) NPV
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
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Transcribed Image Text:J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to
introduce a new mahogany dining room table set. The set will sell for $6,200, including a
set of eight chairs. The company feels that sales will be 1,900, 2,050, 2,600, 2,450, and
2,200 sets per year for the next five years, respectively. Variable costs will amount to 40
percent of sales and fixed costs are $1,810,000 per year. The new tables will require
inventory amounting to 6 percent of sales, produced and stockpiled in the year prior to
sales. It is believed that the addition of the new table will cause a loss of 200 tables per
year of the oak tables the company produces. These tables sell for $3,500 and have
variable costs of 35 percent of sales. The inventory for this oak table is also 6 percent of
sales. The sales of the oak table will continue indefinitely. J. Smythe currently has excess
production capacity. If the company buys the necessary equipment today, it will cost
$19,000,000. However, the excess production capacity means the company can produce
the new table without buying the new equipment. The company controller has said that
the current excess capacity will end in two years with current production. This means
that if the company uses the current excess capacity for the new table, it will be forced
to spend the $19,000,000 in two years to accommodate the increased sales of its
current products. In five years, the new equipment will have a market value of
$3,200,000 if purchased today, and $7,900,000 if purchased in two years. The
equipment is depreciated on a seven-year MACRS schedule. The company has a tax
rate of 21 percent and the required return for the project is 8 percent. MACRS schedule
Calculate the NPV of new project. (Do not round intermediate calculations and enter
your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,
1,234,567.89)
NPV
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