The Baldwin Company_Data
docx
School
University Of Denver *
*We aren’t endorsed by this school
Course
4015
Subject
Finance
Date
Feb 20, 2024
Type
docx
Pages
2
Uploaded by nikki24
Capital Budgeting Problem—Chapter 6 RWJJ
The Baldwin Company
The Baldwin Company is a producer of tennis balls, baseballs, footballs, and golf balls. It is now in search of new profitable investments and is investigating the marketing potential of brightly colored bowling balls. It has already spent $250,000 on questionnaires to consumers to see what their opinion about this new product would be. The results were encouraging.
The Baldwin Company is now considering investing in a machine to produce bowling balls. These bowling balls would be manufactured in a building owned by the firm. This building, which is vacant, and the land it’s sitting on could be otherwise sold for $150,000 after taxes. The guy in charge summarized the details of the project as follows:
-
The cost of the bowling ball machine is $100,000, and it is expected to last 5 years.
-
The machine has an estimated market value at the end of 5 years of $30,000 and will be depreciated according to a 5-year MACRS schedule (see your textbook for this schedule).
-
Production by year during the 5-year life of the machine is expected to be: 5,000 units (Year 1), 8,000 units (Year 2), 12,000 units (Year 3), 10,000 units (Year 4), and 6,000 units (Year 5). -
The price of bowling balls in the first year will be $20 and is expected to grow at 2% per year.
-
First-year production costs are expected to be $10 per unit, and the cost of the material used to produce the bowling balls is expected to grow at 10% per year.
-
Inflation is expected to be 5% per year.
-
The corporate tax rate in the bowling ball project is 34%.
-
Management has determined that if the project is undertaken, an immediate (Year 0) investment of $10,000 in net working capital is required (e.g., for the inventory required).
Net working capital for the following years is projected to be $10,000 (Year 1); $16,320 (Year 2); $24,970 (Year 3); and $21,220 (Year 4). Working capital will be completely recovered by the end of the project’s life. 1
Given this information, answer the following questions:
1.
What is the NPV of this project for Baldwin Company, assuming that the appropriate discount rate for this type of cash flows is 10%? 2.
Should Baldwin get involved in this project? 3.
Perform a sensitivity analysis of the project’s NPV to the choice of discount rate (i.e., draw the NPV profile). How high does the discount rate need to be for the project to be rejected?
2
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Related Questions
5
arrow_forward
I need help figuring out question D. It is highlighted. Attached is what I have
arrow_forward
question 11
Linksys is considering the development of a wireless home networking appliance, called HomeNet, that will provide both the hardware and the software necessary to run an entire home from any Internet connection. HomeNet's lab will be housed in warehouse space that the company could have otherwise rented out for $184,000per year during years 1 through 4. The tax rate for Linksys is 20%.How does this opportunity cost affect HomeNet's incremental earnings?
HomeNet will experience in____________ incremental earnings of $________ per year for the 4 years.
(Select increase or decrease and round to the nearest dollar.)
- an increase
- a decrease
arrow_forward
F1 please help....
arrow_forward
7
arrow_forward
A1
arrow_forward
I want to learn how to solve this specific question
arrow_forward
Don't use AI
arrow_forward
Thanks stepsss
arrow_forward
BO
eBook
The J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The company's president must determine whether to make the expansion a medium- or large-
scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are 0.20, 0.20, and 0.60, respectively. Letting x and y
indicate the annual profit in thousands of dollars, the firm's planners developed the following profit forecasts for the medium- and large-scale expansion projects.
Demand
Low
Medium
High
Medium-Scale
Expansion Profit
f(x)
0.20
X
50
150
200
0.20
0.60
Large-Scale
Expansion Profit
y
f(y)
0.20
0.20
0.60
0
100
300
(a) Compute the expected value for the profit associated with the two expansion alternatives. Round your answers to whole numbers, if needed.
EV
Medium-Scale
Large-Scale
Which decision is preferred for the objective of…
arrow_forward
Question 2. Calculate the internal rate of return of an investment manually and with a financial
calculator.
LI
Q.2.1. Kevin has a manufacturing company. He wants to increase the profit by investing in a new
machine that has savings as follows:
Yr. 1
$105,000
$95,000
$90,000
The new machine costs $250,000. The cost of capital is 15%. Does it make sense to invest in the new
machine? Calculate IRR using the excel spreadsheet, and also using your calculator.
Yr. 2
Yr. 3
arrow_forward
Q30
arrow_forward
5
arrow_forward
klp.1
arrow_forward
Urgent please
arrow_forward
scn
arrow_forward
****Only answer this question if you are sure about the correct answer****
***Return on investment Question***
27. If you want to remodel your house:
a. The house was bought with a cost of $175,000.
b. The house remodel will cost $38,000.
c. After the remodel, the expected house value could increase by 4%
1. What is the ROI % (….........)
2. Yes or no, based on ROI is this a good investment (..............)
arrow_forward
13.
arrow_forward
SEE MORE QUESTIONS
Recommended textbooks for you
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Related Questions
- 5arrow_forwardI need help figuring out question D. It is highlighted. Attached is what I havearrow_forwardquestion 11 Linksys is considering the development of a wireless home networking appliance, called HomeNet, that will provide both the hardware and the software necessary to run an entire home from any Internet connection. HomeNet's lab will be housed in warehouse space that the company could have otherwise rented out for $184,000per year during years 1 through 4. The tax rate for Linksys is 20%.How does this opportunity cost affect HomeNet's incremental earnings? HomeNet will experience in____________ incremental earnings of $________ per year for the 4 years. (Select increase or decrease and round to the nearest dollar.) - an increase - a decreasearrow_forward
- BO eBook The J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The company's president must determine whether to make the expansion a medium- or large- scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are 0.20, 0.20, and 0.60, respectively. Letting x and y indicate the annual profit in thousands of dollars, the firm's planners developed the following profit forecasts for the medium- and large-scale expansion projects. Demand Low Medium High Medium-Scale Expansion Profit f(x) 0.20 X 50 150 200 0.20 0.60 Large-Scale Expansion Profit y f(y) 0.20 0.20 0.60 0 100 300 (a) Compute the expected value for the profit associated with the two expansion alternatives. Round your answers to whole numbers, if needed. EV Medium-Scale Large-Scale Which decision is preferred for the objective of…arrow_forwardQuestion 2. Calculate the internal rate of return of an investment manually and with a financial calculator. LI Q.2.1. Kevin has a manufacturing company. He wants to increase the profit by investing in a new machine that has savings as follows: Yr. 1 $105,000 $95,000 $90,000 The new machine costs $250,000. The cost of capital is 15%. Does it make sense to invest in the new machine? Calculate IRR using the excel spreadsheet, and also using your calculator. Yr. 2 Yr. 3arrow_forwardQ30arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College