(Related to Checkpoint 13.4) (Break-even analysis) The Marvel Mfg. Company is considering whether or not to construct a new robotic production facility. The cost of this new facility is $600,000 and it is expected tohave a six-year life with annual depreciation expense of $100,000 and no salvage value. Annual sales from the new facility are expected to be 2,040 units with a price of $950 per unit. Variable production costs are $600per unit, and fixed cash expenses are $85,000 per year.a. Find the accounting and the cash break-even units of production.b. Will the plant make a profit based on its current expected level of operations?c. Will the plant contribute cash flow to the firm at the expected level of operations?a. The accounting break-even units of production is 242.9 units. (Round to the nearest whole number.)

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 8P

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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.
Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?
(Related to Checkpoint 13.4) (Break-even analysis) The Marvel Mfg. Company is considering whether or not to construct a new robotic production facility. The cost of this new facility is $624,000 and it is expected to have a six-year life with annual depreciation expense of $104,000 and no salvage value. Annual sales from the new facility are expected to be 2,010 units with price of $1,000 per unit. Variable production costs are $610 per unit, and fixed cash expenses are $76,000 per year. a. Find the accounting and the cash break-even units of production. b. Will the plant make a profit based on its current expected level of operations? c. Will the plant contribute cash flow to the firm at the expected level of operations?
Beacon Company is considering automating its production facility. The initial investment in automation would be $9.23 million, and the equipment has a useful life of 8 years with a residual value of $1,070,000. The company will use straight-line depreciation. Beacon could expect a production increase of 40,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Current (no automation) 80,000 units Proposed (automation) 120,000 units Per Unit Total Per Unit Total Sales revenue $ 91 $ ? $ 91 $ ? Variable costs Direct materials $ 17 $ 17 Direct labor 30? Variable manufacturing overhead 9 9 Total variable manufacturing costs 56? Contribution margin $ 35 ? $ 41 ? Fixed manufacturing costs 1,140,000 2,260,000 Net operating income ? ? Required: 3. Determine the project's payback period.
(Related to Checkpoint 13.4) (Break-even analysis) The Marvel Mfg. Company is considering whether or not to construct a new robotic production facility. The cost of this new facility is $600,000 and it is expected to have a six-year life with annual depreciation expense of $100,000 and no salvage value. Annual sales from the new facility are expected to be 2,040 units with a price of $950 per unit. Variable production costs are $600 per unit, and fixed cash expenses are $85,000 per year. a. Find the accounting and the cash break-even units of production. b. Will the plant make a profit based on its current expected level of operations? c. Will the plant contribute cash flow to the firm at the expected level of operations? a. The accounting break-even units of production is 242.9 units. (Round to the nearest whole number.) GEILE
Beacon Company is considering automating its production facility. The initial investment in automation would be $15 million, and the equipment has a useful life of 10 years with a residual value of $500,000. The company will use straight-line depreciation. Beacon could expect a production increase of 40,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Current (no automation) 80,000 units Proposed (automation) 120,000 units Per Unit Total Per Unit Total Sales revenue $ 90 $ ? $ 90 $ ? Variable costs Direct materials $ 18 $ 18 Direct labor 25 ? Variable manufacturing overhead 10 10 Total variable manufacturing costs 53 ? Contribution margin $ 37 ? $ 42 ? Fixed manufacturing costs 1,250,000 2,350,000 Net operating income ? ? Required: 2. Determine the project's accounting rate of return. Note: Round your answer to 2 decimal places.
Beacon Company is considering automating its production facility. The initial investment in automation would be $9.15 million, and the equipment has a useful life of 7 years with a residual value of $1,100,000. The company will use straight- line depreciation. Beacon could expect a production increase of 49,000 units per year and a reduction of 20 percent in the labor cost per unit. Current (no automation) Proposed (automation) 77,000 units126,000 units Production and sales volumePer UnitTotalPer UnitTotal Sales revenue$97$ ?$97$? Variable costs Direct materials$15 $15 Direct labor 20? Variable manufacturing overhead 10 10 Total variable manufacturing costs 45 ? Contribution margin$52?$56? Fixed manufacturing costs $ 1,130,000 $2,230,000 Net operating income ?? 3. Determine the project's payback period. (Round your answer to 2 decimal places.)
Consider the following project for Hand Clapper, Inc. The company is considering a 4-year project to manufacture clap-command garage door openers. This project requires an initial investment of $16.7 million that will be depreciated straight-line to zero over the project’s life. An initial investment in net working capital of $1,070,000 is required tosupport spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $14.3 million in revenues with $5.8 million in operating costs. The tax rate is 22 percent and the discount rate is 14 percent. Themarket value of the equipment over the life of the project is as follows:d. Compute the project NPV assuming the project is abandoned after only threeyears.Year: Market Value ($ millions)1: $ 14.702: $11.703: $9.204: $1.95
Consider the following project for Hand Clapper, Inc. The company is considering a 4-year project to manufacture clap-command garage door openers. This project requires aninitial investment of $16.7 million that will be depreciated straight-line to zero over theproject’s life. An initial investment in net working capital of $1,070,000 is required tosupport spare parts inventory; this cost is fully recoverable whenever the project ends.The company believes it can generate $14.3 million in revenues with $5.8 million inoperating costs. The tax rate is 22 percent and the discount rate is 14 percent. Themarket value of the equipment over the life of the project is as follows: Year Market Value ($ millions)1 $ 14.702 11.703 9.204 1.95a. Assuming Hand Clapper operates this project for four years, what is the NPV?b. Compute the project NPV assuming the project is abandoned after only one year.c. Compute the project NPV assuming the project is abandoned after only two years.d. Compute the…
The replacement of a planing machine is being considered by the Reardorn Furniture Company. (There is an indefinite future need for this type of machine.) The best challenger will cost $30,000 for installation and will have an estimated economic life of 12 years and a $2,000 MV at that time. It is estimated that annual expenses will average $16,000 per year. The defender has a present BV of $6,000 and a presentMV of $4,000. Data for the defender for the next three years are as follows: Using a before-tax interest rate of 15% per year, make a comparison to determine whether it is economical tomake the replacement now.
You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows: Expected sales: 115,000 units per year Unit price: $220 Variable cost: $132 Fixed cost: $4,890,000 The project will last for 10 years and requires an initial investment of $16.70 million, which will be depreciated straight-line over the project life to a final value of zero. The firm's tax rate is 30%, and the required rate of return is 12%. However, you recognize that some of these estimates are subject to error. In one scenario a sharp rise in the dollar could cause sales to fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $210. The good news is that fixed costs could be as low as $3,260,000, and variable costs would decline in proportion to sales. a. What is project NPV if all variables are as expected? Note: Do not round intermediate calculations. Enter your answer in thousands not in…

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