QUESTION 6 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $120. The production cost of each heater is $90. The fixed cost of production is $35000. You are expecting to sell 3000 units per year. This project has an economic life of 5 years. The project requires an investment of $125000 in plants and equipment. This equipment will be depreciated using a straight line depreciation method to a salvage value of zero. The required rate of return for the project is 12 percent. The marginal corporate tax rate is 21 percent. Based on these assumptions. calculate the degree of operating leverage (DOL)?

QUESTION 6 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $120. The production cost of each heater is $90. The fixed cost of production is $35000. You are expecting to sell 3000 units per year. This project has an economic life of 5 years. The project requires an investment of $125000 in plants and equipment. This equipment will be depreciated using a straight line depreciation method to a salvage value of zero. The required rate of return for the project is 12 percent. The marginal corporate tax rate is 21 percent. Based on these assumptions. calculate the degree of operating leverage (DOL)?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 28P: Friedman Company is considering installing a new IT system. The cost of the new system is estimated...

See similar textbooks

Similar questions

New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer’s base price is $1,080,000, and it would cost another $22,500 to install it. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $605,000. The MACRS rates for the first 3 years are 0.3333, 0.4445, and 0.1481. The machine would require an increase in net working capital (inventory) of $15,500. The sprayer would not change revenues, but it is expected to save the firm $380,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 35%. What is the Year-0 cash flow? What are the net operating cash flows in Years 1, 2, and 3? What is the additional Year-3 cash flow (i.e., the after-tax salvage and the return of working capital)? If the project’s cost of capital is 12%, should the machine be purchased?
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?
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.
Shonda & Shonda is a company that does land surveys and engineering consulting. They have an opportunity to purchase new computer equipment that will allow them to render their drawings and surveys much more quickly. The new equipment will cost them an additional $1.200 per month, but they will be able to increase their sales by 10% per year. Their current annual cost and break-even figures are as follows: A. What will be the impact on the break-even point if Shonda & Shonda purchases the new computer? B. What will be the impact on net operating income if Shonda & Shonda purchases the new computer? C. What would be your recommendation to Shonda & Shonda regarding this purchase?
Washington-Pacific (W-P) invested $4 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 10 years, at which time W-P plans to sell the forest at an expected price of $8 million. What is W-P’s expected rate of return?
QUESTION 2 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $120. The production cost of each heater is $90. The fixed cost of production is $35000. You are expecting to sell 3000 units per year. This project has an economic life of 5 years. The project requires an investment of $125000 in plants and equipment. This equipment will be depreciated using a straight-line depreciation method to a salvage value of zero. The required rate of return for the project is 12 percent. The marginal corporate tax rate is 21 percent. Do a sensitivity analysis using different numbers of production units. Assume that number of units can be between 2400 and 3750 units. What is the minimum net present value based on the range of units expected to be sold?
QUESTION 4 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $125. The production cost of each heater is $110. The fixed cost of production is $45000. You are expecting to sell 10500 units per year. This project has an economic life of 9 years. The project requires an investment of $555000 in plants and equipment. This equipment will be depreciated using a straight line depreciation method to a salvage value of zero. The required rate of return for the project is 8 percent. The marginal corporate tax rate is 21 percent. Based on these assumptions, calculate the degree of operating leverage (DOL)? 3.4 O 3.1 O 3.2 3.3
QUESTION 3 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $65. The production cost of each heater is $50. The fixed cost of production is $40000. You are expecting to sell 8200 units per year. This project has an economic life of 7 years. The project requires an investment of $285000 in plants and equipment. This equipment will be depreciated using a straight line depreciation method to a salvage value of zero. The required rate of return for the project is 14 percent. The marginal corporate tax rate is 22 percent. Do a sensitivity analysis using different sales prices per unit. Assume that the sales price can be between $81.25 and $58.5. What is the maximum net present value based on the range of the sales price per unit? O 31036 O 476741 O 691022 O 305316
QUESTION 4 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $55. The production cost of each heater is $35. You are expecting to sell 9000 units per year. This project has an economic life of 6 years. The project requires an investment of $700000 in plants and equipment. This equipment will be depreciated to zero salvage value based on 5-year MACRS schedule. The depreciation rates from year 1 to 6 are 20 % , 32 %, 19.2 %, 11.52 %, 11.52 %, and 5.76 percent, respectively. The required rate of return for the project is 12 percent, the working capital requirement is 10 percent of the next year's sales revenue. The company will sell its old equipment for $100,000. The old machine is fully depreciated. The marginal corporate tax rate is 20 percent. At the termination of the project, the plant and equipment will be sold for an estimated value of $50000. Based on these assumptions, estimate the total cash flows for the project.…
QUESTION 2 You are considering starting new factory producing small electric heaters. Each unit will sell at a price of $55. The production cost of each heater is $35. You are expecting to sell 9000 units per year. This project has an economic life of 6 years. The project requires an investment of $700000 in plants and equipment. This equipment will be depreciated to zero salvage value based on 5-year MACRS schedule. The depreciation rates from year 1 to 6 are 20 % ,32 %, 19.2 %, 11.52 %, 11.52 %, and 5.76 percent, respectively. The required rate of return for the project is 12 percent, the working capital requirement is 10 percent of the next year's sales revenue. The company will sell its old equipment for $100,000. The old machine is fully depreciated. The marginal corporate tax rate is 20 percent. At the termination of the project, the plant and equipment will be sold for an estimated value of $50000. Based on these assumptions, estimate the working capital requirements for the…
QUESTION 3 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $55. The production cost of each heater is $35. You are expecting to sell 9000 units per year. This project has an economic life of 6 years. The project requires an investment of $700000 in plants and equipment. This equipment will be depreciated to zero salvage value based on 5-year MACRS schedule. The depreciation rates from year 1 to 6 are 20 % ,32 %, 19.2 %, 11.52 %, 11.52 %, and 5.76 percent, respectively. The company will sell its old equipment for $100,000. The old machine is fully depreciated. The required rate of return for the project is 12 percent, the working capital requirement is 10 percent of the next year's sales revenue. The marginal corporate tax rate is 20 percent. At the termination of the project, the plant and equipment will be sold for an estimated value of $50000. Based on these assumptions, estimate the cash flow for capital expenditures.…
QUESTION 6 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $55. The production cost of each heater is $35. You are expecting to sell 9000 units per year. This project has an economic life of 6 years. The project requires an investment of $700000 in plants and equipment. This equipment will be depreciated to zero salvage value based on 5-year MACRS schedule. The depreciation rates from year 1 to 6 are 20 %,32 %, 19.2 %, 11.52 %, 11.52 %, and 5.76 percent, respectively. The required rate of return for the project is 12 percent, the working capital requirement is 10 percent of the next year's sales revenue. The company will sell its old equipment for $100,000. The old machine is fully depreciated. The marginal corporate tax rate is 20 percent. At the termination of the project, the plant and equipment will be sold for an estimated value of $50000. Based on these assumptions, estimate the internal rate of return for this…