Master Craft Corp. currently sells 22,000 motor homes per year at $58,000 each, and 16,000 luxury motor coaches per year at $110,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 7,000 of these campers per year at $22,000 each. An independent consultant has determined that if Master Craft introduces the new campers, it should boost the sales of its existing motor homes by 2,500 units per year and reduce the sales of its motor coaches by 1,200 units per year. This project increases the annual fixed costs by $2,000,000. Here are the costs per unit: Variable costs 50,000 99,000 17,000 Motor home $ Motor coach $ Portable camper $ The project requires buying new specialized equipment that costs $15,000,000. The company must pay $200,000 more for installation costs. The total cost could be depreciated at 20% per year (class 8). Note that the 50% rule applies. The equipment will have a resale value of $10,000,000 in three years. The company needs additional space. Master Craft Corp. is acquiring a building at the price of $4,800,000. It will be fully occupied by the project activities. The asset falls into Class 1 for tax purposes (CCA rate of 4% per year), and the 50% rule applies. The building could actually be worth $4,700,000 in three years. The project requires the company to increase the net working capital by $125,000 today and an additional $10,000 in one year. The company requires a 14% return on the project. Assume a tax rate of 29%. a. What is the net present value? Should the company undertake this three-year project? Please show all your calculations and explain.
Master Craft Corp. currently sells 22,000 motor homes per year at $58,000 each, and 16,000 luxury motor coaches per year at $110,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 7,000 of these campers per year at $22,000 each. An independent consultant has determined that if Master Craft introduces the new campers, it should boost the sales of its existing motor homes by 2,500 units per year and reduce the sales of its motor coaches by 1,200 units per year. This project increases the annual fixed costs by $2,000,000. Here are the costs per unit: Variable costs 50,000 99,000 17,000 Motor home $ Motor coach $ Portable camper $ The project requires buying new specialized equipment that costs $15,000,000. The company must pay $200,000 more for installation costs. The total cost could be depreciated at 20% per year (class 8). Note that the 50% rule applies. The equipment will have a resale value of $10,000,000 in three years. The company needs additional space. Master Craft Corp. is acquiring a building at the price of $4,800,000. It will be fully occupied by the project activities. The asset falls into Class 1 for tax purposes (CCA rate of 4% per year), and the 50% rule applies. The building could actually be worth $4,700,000 in three years. The project requires the company to increase the net working capital by $125,000 today and an additional $10,000 in one year. The company requires a 14% return on the project. Assume a tax rate of 29%. a. What is the net present value? Should the company undertake this three-year project? Please show all your calculations and explain.
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
Related questions
Question
Transcribed Image Text:Master Craft Corp. currently sells 22,000 motor homes per year at $58,000 each, and 16,000 luxury motor
coaches per year at $110,000 each. The company wants to introduce a new portable camper to fill out its
product line; it hopes to sell 7,000 of these campers per year at $22,000 each. An independent consultant
has determined that if Master Craft introduces the new campers, it should boost the sales of its existing
motor homes by 2,500 units per year and reduce the sales of its motor coaches by 1,200 units per year.
This project increases the annual fixed costs by $2,000,000.
Here are the costs per unit:
Variable costs
50,000
99,000
17,000
Motor home
$
Motor coach
$
Portable camper $
The project requires buying new specialized equipment that costs $15,000,000. The company must pay
$200,000 more for installation costs. The total cost could be depreciated at 20% per year (class 8). Note
that the 50% rule applies. The equipment will have a resale value of $10,000,000 in three years.
The company needs additional space. Master Craft Corp. is acquiring a building at the price of $4,800,000.
It will be fully occupied by the project activities. The asset falls into Class 1 for tax purposes (CCA rate of
4% per year), and the 50% rule applies. The building could actually be worth $4,700,000 in three years.
The project requires the company to increase the net working capital by $125,000 today and an additional
$10,000 in one year.
The company requires a 14% return on the project. Assume a tax rate of 29%.
a. What is the net present value? Should the company undertake this three-year project? Please show
all your calculations and explain.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 5 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
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 Professor
Publisher:
McGraw-Hill Education