Arel, which produces X Goods, plans a total investment of 5,000,000 pounds using 3,000,000 TI of equity and 2,000,000 pounds of foreign capital with 40% interest. According to the calculations, the total fixed expenses of the project is 2,800,000 pounds, while the head of the unit changes, the expenses are 500 pounds, and the estimated sales price of the product produced is 900 pounds. The capacity of the project is 25,000 units. In the face of this situation; a) what is the breakeven point that closes interest payments ? b) what is the upside point if 25% profit on equity demands labor ? c) What is the breakeven point if it wants to make a profit in the amount corresponding to 15% of the close?

Arel, which produces X Goods, plans a total investment of 5,000,000 pounds using 3,000,000 TI of equity and 2,000,000 pounds of foreign capital with 40% interest. According to the calculations, the total fixed expenses of the project is 2,800,000 pounds, while the head of the unit changes, the expenses are 500 pounds, and the estimated sales price of the product produced is 900 pounds. The capacity of the project is 25,000 units. In the face of this situation; a) what is the breakeven point that closes interest payments ? b) what is the upside point if 25% profit on equity demands labor ? c) What is the breakeven point if it wants to make a profit in the amount corresponding to 15% of the close?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 11P

See similar textbooks

Similar questions

Your division is considering two investment projects, each of which requires an up-front expenditure of 25 million. You estimate that the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars): a. What is the regular payback period for each of the projects? b. What is the discounted payback period for each of the projects? c. If the two projects are independent and the cost of capital is 10%, which project or projects should the firm undertake? d. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake? e. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake? f. What is the crossover rate? g. If the cost of capital is 10%, what is the modified IRR (MIRR) of each project?
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?
The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of 50 million on a large-scale, integrated plant that will provide an expected cash flow stream of 8 million per year for 20 years. Plan B calls for the expenditure of 15 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of 3.4 million per year for 20 years. The firms cost of capital is 10%. a. Calculate each projects NPV and IRR. b. Set up a Project by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant. What are the NPV and the IRR for this Project ? c. Graph the NPV profiles for Plan A, Plan B, and Project .
The total capital investment for a conventional chemical plant is $2,000,000, and theplant produces 4500 tons of product annually. The selling price of the product is $0.86/kg.Working capital amounts to 18 percent of the total capital investment. The investment is fromcompany funds, and no interest is charged. Raw-materials costs for the product are $0.11/kg, labor $0.09/kg, utilities $0.06/kg, and packaging $0.010/kg. Distribution costs are 4 percent ofthe total product cost. Estimate the following:(a) Manufacturing cost per kilogram of product.(b) Total product cost per year.(c) Profit per kilogram of product before taxes.(d) Profit per kilogram of product after taxes
A project requires an investment of P400,000, lasts 15 years, and is estimated that the sales will be P800,000 per year. The operating expenses are as follows: Materials: P160,000 per year Labor: P280,000 per year Overhead: P40,000 per year + 10% of sales of year Selling expense: P60,000 per year If it is expected to earn at least 20% of the capital, is the investment desirable? Using ROR and AWM
American Manufacturer has the opportunity to invest in a 4 year project that required an initial investment of $900,000 and generated cash flow of $100,000 in each of the first 2 years and $400,000 in each of the last two years. If the firm has a weighted average cost of capital of 10%, the firm should ________ the project because ________
The Webster Corp. is planning construction of a new shipping depot for its single manufacturing plant. The initial cost of the investment is $1 million. Efficiencies from the new depot are expected to reduce costs by $100,000 per year forever. The corporation has a total value of $60 million and has outstanding debt of $40 million. What is the NPV of the project if the firm has an after tax cost of debt of 6% and a cost equity of 9%? A. $428,571 B. $565,547 C. $1,000,000 D. None of these is the correct NPV
A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues.The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%. Calculate the NPV of the project. A. 8443 C. –2735B. 3840 D. None of the above
Heyden Motion Solutions ordered $7 million worth of seamless tubes for manufacturing their high performance and precision linear motion products. If their annual operating costs are $860,000 per year, how much annual revenue is required over a 3-year planning period to recover the initial investment and operating costs at the company’s MARR of 15% per year?
Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $100,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. The firm's required rate of return for these projects is 10%. The net present value for Project A is a.$26,074. b.$21,074. c.$12,358. d.$16,947.
XYZ, Co. has conducted extensive market analysis on a market expansion at the cost of $2 million. If they proceed, they will have to purchase land at $650,000, build a structure costing $4 million, equip the structure at a cost of $161,000, train the staff at a cost of $50,000 and fund working capital of $1 million. New revenues will be about $2.3 million with variable costs at 60% of sales. Which of these costs would be included in the cash flows of time zero and what should be included in the depreciable basis?
A project requires an initial investment in equipment of $90,000 and also requires an initial investment in net working capital of $20,000 (at t = 0), net working capital is recovered at the end of the project. The research and development (R&D) costs so far have totaled about $100,000. You expect the project to produce sales revenue of $120,000 per year for three years. You estimate manufacturing costs at 60% of revenues. (Assume all revenues and costs occur at year-end, i.e., t = 1, t = 2, and t = 3.) The equipment depreciates using straight-line depreciation to zero over three years. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 16.5%. Calculate the NPV of the project.