You are the financial analyst for a tennis racket manufacturer. The company isconsidering using a graphitelike material in its tennis rackets. The company hasestimated the information in the following table about the market for a racket with thenew material. The company expects to sell the racket for 5 years. The equipmentrequired for the project will be depreciated on a straight-line basis and has no salvagevalue. The required return for projects of this type is 14 percent and the company has a23 percent tax rate.Market sizeMarket shareSelling priceVariable costs perunitFixed costs per yearInitial investmentPessimistic118,000PessimisticExpectedOptimistic18%$ 166$111$ 983,000$ 1,690,000Expected128,00022%$171$ 107$ 928,000$ 1,540,000Optimistic140,00024%$175$ 104$ 898,000$1,520,000Calculate the NPV for each case for this project. Assume a negative taxable incomegenerates a tax credit. (A negative amount should be indicated by a minus sign. Donot round intermediate calculations and round your answers to 2 decimal places, e.g.,32.16.)

Net present value is a tool used to assess the future profitability of an investment, project, or…

Answered: You are the financial analyst for a…

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter26: Capital Budgeting (capbud)

Section: Chapter Questions

Problem 5R

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You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for 6 years. The equipment required for the project will be depreciated on a straight-line basis and has no salvage value. The required return for projects of this type is 13 percent and the company has a 21 percent tax rate. Pessimistic Expected Optimistic Market size 116,000 126,000 138,000 Market share 19 % 23 % 25 % Selling price $ 166 $ 171 $ 175 Variable costs per unit $ 109 $ 105 $ 102 Fixed costs per year $ 981,000 $ 926,000 $ 896,000 Initial investment $ 1,986,000 $ 1,836,000 $ 1,816,000 Calculate the NPV for each case for this project. Assume a…
You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for 5 years. The equipment required for the project will be depreciated on a straight-line basis and has no salvage value. The required return for projects of this type is 14 percent and the company has a 22 percent tax rate. Market size Market share Pessimistic 127,000 Expected Optimistic 137,000 149,000 18% 22% 24% Selling price $ 146 $151 $155 Variable costs per $96 $92 $ 89 unit Fixed costs per year $ 968,000 $ 913,000 Initial investment $ 1,620,000 $ 1,470,000 $ 883,000 $1,450,000 Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit. (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and…
You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphite–like material in its tennis rackets. The company has estimated the information in the table below about the market for a racket with the new material. The company expects to sell the racket for four years. The equipment required for the project has no salvage value and will be depreciated on a straight-line basis. The required return for projects of this type is 12 percent, and the company has a 34 percent tax rate. Pessimistic Expected Optimistic Market size 121,000 136,000 161,000 Market share 21 % 24 % 26 % Selling price $ 144 $ 149 $ 155 Variable costs per unit $ 98 $ 93 $ 92 Fixed costs per year $ 959,000 $ 914,000 $ 884,000 Initial investment $ 1,248,000 $ 1,180,000 $ 1,112,000 Calculate the NPV for each case for this project.
You are the financial analyst for a tennis racquet manufacturer. The company is considering using a graphite-like material in its tennis racquets. The company has estimated the information in the following table about the market for a racquet with the new material. The company expects to sell the racquet for six years. The equipment required for the project has no salvage value. The equipment will be depreciated straight-line to zero over the project's life. The required return for projects of this type is 13 percent, and the company has a 40 percent tax rate. Assume the company has other profitable ongoing operations that are sufficient to cover any losses. Should you recommend the project? Market sire Market share Selling price Variable costs per unit Fised costs per year Initial investment Pessimistic 135,000 PVPessimistic PVExpected $ UPVoptimistic S 21 N 1 1 Expected 155,000 25 % 145 104.50 $ 1,065,000 11,075,000 12,450,000 $ 2,350,000 2262561 4998543 7326488 150 100.50 $ $…
Your company has been approached to bid on a contract to sell 5,000 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $3.5 million and will be depreciated on a straight- line basis to a zero salvage value. Production will require an investment in net working capital of $415,000 which will be returned at the end of the project, and the equipment can be sold for $345,000 at the end of production. Fixed costs are $590,000 per year, and variable costs are $79 per unit. In addition to the contract, you feel your company can sell 12,200, 14,300, 18,300, and 10,800 additional units to companies in other countries over the next four years, respectively, at a price of $181. This price is fixed. The tax rate is 24 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the…
You are the financial analyst for furniture manufacturer. The company is considering using a certain new raw material in its furniture. The company has estimated the information in the following table about the market for a chair with the new material. The company expects to sell the chair for six years. The equipment required for the project has no salvage value. The required return for projects of this type is 13 percent, and the company has a 40 percent tax rate. Pessimistic Expected Optimistic Market size 130,000 150,000 165,000 Market share 21% 25% 28% Selling price $140 $145 $150 Variable costs per unit $102 $98 $94 Fixed costs per year $1,015,000 $950,000 $900,000 Initial investment $2,200,000 $2,100,000 $2,000,000 Required: Should you recommend the project?
You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphite like material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for four years. The equipment required for the project has no salvage value. The required return for projects of this type is 12 percent, and the company has a 34 percent tax rate. Pessimistic Expected Optimistic Market size 121,000 136,000 161,000 Market share 21 % 24 % 26 % Selling price $ 144 $ 149 $ 155 Variable costs per unit $ 98 $ 93 $ 92 Fixed costs per year $ 959,000 $ 914,000 $ 884,000 Initial investment $ 1,248,000 $ 1,180,000 $ 1,112,000 Calculate the NPV for each case for this project
Super Apparel wants to replace an old machine with a new one. The new machine would increase annual revenue by $200,000 and annual operating expenses by $80,000. The new machine would cost $400, 000. The estimated useful life of the machine is 10 years with zero salvage value. i. Compute the Accounting Rate of Return (ARR) of the machine using the above information. ii. Should Super Apparel purchase the machine if management wants an Accounting Rate of Return (ARR) of 19% on all capital investments? Hint: Use Average Income or Profit after deducting tax, depreciation, and operating expenses.
You are also considering another project that has a physical life of 3 years—that is, the machinery will be totally worn out after 3 years. However, if the project were terminated prior to the end of 3 years, the machinery would have a positive salvage value. Here are the project’s estimated cash flows: Using the 10% cost of capital, what is the project’s NPV if it is operated for the full 3 years? Would the NPV change if the company planned to terminate the project at the end of Year 2? At the end of Year 1? What is the project’s optimal (economic) life?
Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. Should Chen buy the new machine?
Your company has been approached to bid on a contract to sell 19,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4,000,000 and will be depreciated on a straight- line basis to a zero salvage value. Production will require an investment in net working capital of $140,000 to be returned at the end of the project, and the equipment can be sold for $260,000 at the end of production. Fixed costs are $795,000 per year and variable costs are $43 per unit. In addition to the contract, you feel your company can sell 4,600, 12,200, 14,200, and 7,500 additional units to companies in other countries over the next four years, respectively, at a price of $140. This price is fixed. The tax rate is 23 percent, and the required return is 12 percent. Additionally, the president of the company will undertake the project only…
Your company has been approached to bid on a contract to sell 20,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4,800,000 and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $180,000 to be returned at the end of the project, and the equipment can be sold for $300,000 at the end of production. Fixed costs are $835,000 per year and variable costs are $41 per unit. In addition to the contract, you feel your company can sell 5,400, 13,000, 15,000, and 8,300 additional units to companies in other countries over the next four years, respectively, at a price of $140. This price is fixed. The tax rate is 21 percent, and the required return is 11 percent. Additionally, the president of the company will undertake the project only…

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