EconomicsQUESTION 3An automobile company needs to decide of outsourcing shafts or producing shafts in the company. If the company outsource the shafts, theshafts could be purchased in the first year for $35 per shaft but the price of shaft for the subsequent years will increase by 5% from the previousyear. If the company decide to produce the shafts, an investment of $3,000,000 needed for equipment and upgrades. The total annual costassociated with production (e.g. fixed, variable, labor and material cost) is $1,000,000. The annual demand is 40,000 shafts for the next 7 years.The new equipment purchased will have a salvage value of $450,000 at the end of year 7.If the company interest rate is 5%, which of the following statements is correct?O The company should outsource the shafts and the annual equivalent savings is $119,794O The company should produce the shafts and the annual equivalent savings is $119,794The company should outsource the shafts since the AEC per unit from outsourcing will be $36.58 while the AEC per unit fromproducing the shaft is $ 40.32The company should produce the shafts since the AEC per unit from producing is $36.58 while the AEC per unit from outsourcing theshaft is $ 40.32

Given: If the company outsource the shafts, the shafts could be purchased in the first year for $35…

eds to decide of outsourcing shafts or producing shafts in the in the first year for $35 per shaft but the price of shaft for the to produce the shafts, an investment of $3,000,000 needed (e.g. fixed, variable, labor and material cost) is $1,000,000. T sed will have a salvage value of $450,000 at the end of year e is 5%, which of the following statements is correct?

eds to decide of outsourcing shafts or producing shafts in the in the first year for $35 per shaft but the price of shaft for the to produce the shafts, an investment of $3,000,000 needed (e.g. fixed, variable, labor and material cost) is $1,000,000. T sed will have a salvage value of $450,000 at the end of year e is 5%, which of the following statements is correct?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...

See similar textbooks

Similar questions

Average rate of returncost savings Maui Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of 125,000 with a 15,000 residual value and an eight-year life. The equipment will replace one employee who has an average wage of 28,000 per year. In addition, the equipment will have operating and energy costs of 5,150 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment.
Average rate of returnnew product Hana Inc. is considering an investment in new equipment that will be used to manufacture a smart-phone. The phone is expected to generate additional annual sales of 10,000 units at 300 per unit. The equipment has a cost of 4,500,000, residual value of 500,000, and a 10-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Determine the average rate of return on the equipment.
Return on Investment and Economic Value Added Calculations with Varying Assumptions Knitpix Products is a division of Parker Textiles Inc. During the coming year, it expects to earn income of 310,000 based on sales of 3.45 million. Without any new investments, the division will have average operating assets of 3 million. The division is considering a capital investment projectadding knitting machines to produce gaitersthat requires an additional investment of 600,000 and increases net income by 57,500 (sales would increase by 575,000). If made, the investment would increase beginning operating assets by 600,000 and ending operating assets by 400,000. Assume that the actual cost of capital for the company is 7%. (Note: Round all answers to four decimal places.) Required: 1. Compute the ROI for the division without the investment. 2. Compute the margin and turnover ratios without the investment. Show that the product of the margin and turnover ratios equals the ROI computed in Requirement 1. 3. CONCEPTUAL CONNECTION Compute the ROI for the division with the new investment. Do you think the divisional manager will approve the investment? 4. CONCEPTUAL CONNECTION Compute the margin and turnover ratios for the division with the new investment. How do these compare with the old ratios? 5. CONCEPTUAL CONNECTION Compute the EVA of the division with and without the investment. Should the manager decide to make the knitting machine investment?
Gelbart Company manufactures gas grills. Fixed costs amount to 16,335,000 per year. Variable costs per gas grill are 225, and the average price per gas grill is 600. Required: 1. How many gas grills must Gelbart Company sell to break even? 2. If Gelbart Company sells 46,775 gas grills in a year, what is the operating income? 3. If Gelbart Companys variable costs increase to 240 per grill while the price and fixed costs remain unchanged, what is the new break-even point?
REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings from 24,000 to 46,000 per year. The new machine will cost 80,000, and it will have an estimated life of 8 years and no salvage value. The new riveting machine is eligible for 100% bonus depreciation at the time of purchase. The applicable corporate tax rate is 25%, and the firms WACC is 10%. The old machine has been fully depreciated and has no salvage value. Should the old riveting machine be replaced by the new one? Explain your answer.
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 25%. What is the initial investment outlay? The company spent and expensed $150,000 on research related to the new product last year. What is the initial investment outlay? Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. What is the initial investment outlay?
Net present value method for a service company Coast-to-Coast Inc. is considering the purchase of an additional delivery vehicle for 70,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of 15,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be 65,000 per year for each of the next five years. A driver will cost 40,000 in 20Y1, with an expected annual salary increase of 2,000 for each year thereafter. The annual operating costs for the truck are estimated to be 6,000 per year. a. Determine the expected annual net cash flows from the delivery truck investment for 20Y120Y5. b. Compute the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the present value table appearing in Exhibit 2 of this chapter. c. Is the additional truck a good investment based on your analysis? Explain.