Answered: at the project will have about…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Problem #2 Lebanon Metal Company (LMC), a manufacturer of various metal parts, must decide whether to enter the competition to become the supplier of transmission housings for Gulf Electric, a company that produces the housings in its own in-house manufacturing To compete, LMC must purchase a new forge that will cost $150,000. If LMC gets the order, it may be able to sell as many as 3,000 units per year to Gulf Electric for $60 each, and costs will be $15 per unit. The firm expects that the project will have about five-year product life. The firm also estimates that the amount ordered by Gulf Electric in the first year will be ordered in each of the subsequent four years . The initial investment can be depreciated on a MACRS-GDS basis over a 5year period, the tax-rate is expected to remain 40%. At the end of five years, the forge is expected to retain a market value of $50,000 at the end of year 5. LMC's before tax MARR is 15% per year. Problem #2 Part A: Create a spreadsheet to determine whether LMC should enter the competition to become the supplier of transmission housings for Gulf Electric. Calculate the present-worth of ATCF to decide if it is a good investment. Part B:LMC's managers are uneasy about this project, because too many uncertain elements have not been considered in the analysis. Perform a sensitivity analysis for each variable (initial investment, selling price, demand, market value , study period and MARR ). Graphically, using a spider plot, investigate the sensitivity of the PW of the BTCF to changes in the above factors. Investigate changes over the interval =20\% . To which variable is the project the most sensitive Part C: LMC's managers become convinced that the PW is quite sensitive to changes in market value. Determine the break-even PW as a function of that variable.

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