A family that runs a family business by selling all kinds of arts and crafts products, is trying to analyze the profitability of its new business idea. They are thinking of designing and selling cuckoo clocks, a project that the family would be running for 7 years. Buying all the necessary production equipment upfront would cost the family $1,100. It is hoping that it would be able to generate $700 in annual profits, after taxes. The appropriate discount rate for this project is 9%. Obviously, the profitability of this new project greatly depends on the family correctly estimating the annual sales of the cuckoo clocks! Calculations can show that if the annual after-tax profits turn out to be $200 higher than the family's original estimate, then the estimated Net Present Value of the project will increase by 32.32 %.

A family that runs a family business by selling all kinds of arts and crafts products, is trying to analyze the profitability of its new business idea. They are thinking of designing and selling cuckoo clocks, a project that the family would be running for 7 years. Buying all the necessary production equipment upfront would cost the family $1,100. It is hoping that it would be able to generate $700 in annual profits, after taxes. The appropriate discount rate for this project is 9%. Obviously, the profitability of this new project greatly depends on the family correctly estimating the annual sales of the cuckoo clocks! Calculations can show that if the annual after-tax profits turn out to be $200 higher than the family's original estimate, then the estimated Net Present Value of the project will increase by 32.32 %.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter18: Pricing And Profitability Analysis

Section: Chapter Questions

Problem 11E

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