The Stanton Stationery Shoppe wants to acquire TheCarlysle Card Gallery for $450,000. Stanton expects the merger to provide incremental earningsof about $70,000 a year for 10 years. Carol Stanton has calculated the marginal cost ofcapital for this investment to be 8%. Conduct a capital budgeting analysis for Stanton todetermine whether she should purchase The Carlysle Card Gallery.

The Stanton Stationery Shoppe wants to acquire TheCarlysle Card Gallery for $450,000. Stanton expects the merger to provide incremental earningsof about $70,000 a year for 10 years. Carol Stanton has calculated the marginal cost ofcapital for this investment to be 8%. Conduct a capital budgeting analysis for Stanton todetermine whether she should purchase The Carlysle Card Gallery.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 10PB: Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce...

See similar textbooks

Similar questions

Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 13%. Should Wansley purchase the paper company? Wansley realizes that the cash flows in Years 1 to 20 might be $30 million per year or $50 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 13%. Wansley can wait for 1 year and find out whether the cash flows will be $30 million per year or $50 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits to purchase, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 13%.
Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce annual net cash flows of $21,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether Bouvier should invest in the grill.
The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000, with annual net cash flows of $9,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether or not you would recommend that Ham and Egg invest in this oven.
Managers of Central Embroidery have decided to purchase a new monogram machine and are considering two alternative machines. The first machine costs $100,000 and is expected to last five years. The second machine costs $160,000 and is expected to last eight years. Assume that the opportunity cost of capital is 8 percent. Which machine should Central Embroidery purchase?
eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $50,000 to purchase and install and $32,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $58,000 per year. The firm’s cost of capital (discount rate) is 11%. Required: 1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the appropriate present value factors from Appendix C, TABLE 1 and Appendix C, TABLE 2.) 1a. The firm is not yet profitable and therefore pays no income taxes. 1b. The firm is in the 26% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 26% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB…
John Wiggins is contemplating the purchase of a small restaurant. The purchase price listed by the seller is $800,000. John has used past financial information to estimate that the net cash flows (cash inflows less cash outflows) generated by the restaurant would be as follows: Required: Assuming that John desires a 10% rate of return on this investment, should the restaurant be purchased? (Assume that all cash flows occur at the end of the year.)
es eEgg is considering the purchase of a new distributed network computer system to help handle Its warehouse Inventories. The system costs $55,000 to purchase and install and $32,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing Inventories by $60,000 per year. The firm's cost of capital (discount rate) is 10%. Required: 1. What is the net present value (NPV) of the proposed Investment under each of the following Independent situations? (Use the appropriate present value factors from Appendix C, TABLE 1 and Appendix C. TABLE 2.) 1a. The firm is not yet profitable and therefore pays no income taxes. 1b. The firm is in the 22% Income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 22% Income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB…
eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $60,000 to purchase and install and $30,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $62,000 per year. The firm's cost of capital (discount rate) is 9%. Required: 1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the appropriate present value factors from Appendix C. TABLE 1 and Appendix C. TABLE 2.) 1a. The firm is not yet profitable and therefore pays no income taxes. 1b. The firm is in the 25% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 25% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB…
Gondoko Manufacturing is considering purchasing two machines. Each machine costs P90,000 and will produce cash flows as follows: End of Year Machine B A 1 P 50,000 P 10,000 2 40,000 20,000 3 20,000 110,000 Turk Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. Which machine should Turk purchase? Group of answer choices Neither machine is acceptable. Only Machine B is acceptable. Both machines are acceptable, but A should be selected because it has the greater net present value. Both machines are acceptable, but B should be selected because it has the greater net present value. Only Machine A is acceptable.
Kay Sadilla is considering investing in a franchise that requires an initialoutlay of $75,000. She conducted market research and found that after-taxcash flows on the investment should be about $15,000 per year for the next7 years. The franchiser stated that Kay would generate a 20 percent return.Her cost of capital is 10 percent. Find the following:a. The PVBb. The PVCc. The NPVd. The IRR
KMT Stores is considering a renovation of its store. The project will cost $100,000.00. The company can issue 7%, $5,000.00 bonds to finance 90% of the project. The remaining capital will come from internal sources. The renovation should enable the business to serve more customers. Complete the form to evaluate the effect of financial leverage on the proposed renovation. Evaluate the earnings potential of the project assuming that operating income will increase by 6%, 7%, or 8% of the project cost.
MAG Industrial needs 1000 square meters of storage space. Purchasing land for $80,000 and then erecting a temporary metal building at $70 persquare meter is one option. The president hopes to sell the land for $100,000 and the building for $20,000 after 3 years. Another option is to lease space for $30 per square meter per year payable at the beginning of each year. The MARR is 20%. Perform a present worth analysis of the building and leasing alternatives to determine the sensitivity of the decision if the construction cost decreases by 10% to $63 per square meter and the lease cost remainsat $30 per square meter per year.