Use the below tables to solve the problem. Present value of S110% 12%0.962 0.943 0.926 0.909 0.893 0.877 0.862 0.847 0.8330.925 0.890 | 0.857 0.826 | 0.797 0.769 0.743 0.718 0.6940.889 0.840 | 0.794 | 0.751 0.712 0.675 | 0.641 | 0.609 0.5790.855 0.792 0.735 | 0.683 0.636 | 0.592 0.552 0.516 | 0.4820.822 0.747 0.681 | 0.621 0.567 0.519 0.476 0.437 0.4020.790 0.705 | 0.630 | 0.564 0.507 0.456 | 0.410 0.370 | 0.3350.760 0.665 0.583 0.513 0.453 0.400 0.354 0.314 0.2790.731 0.627 0.540 0.467 0.404 0.351 0.305 0.266 0.2330.703 0.592 0.500 0.424 0.361 0.308 0.263 0.225 0.1940.676 0.558 0.463 | 0.386 0.322 | 0.270 0.227 0.191 | 0.162Periods4%6%8%14% 16% 18%20%123467910Present value of an annuityPeriods4%6%8% 10% 12% 14% 16% 18% 20%0.962 0.943 | 0.926 | 0.909 0.893 0.877 0.862 0.847 0.8331.886 1.833 | 1.783 | 1.736 | 1.690 | 1.647| 1.605 1.566 1.5282.775 2.673| 2.577 2.487 2.402 2.322 | 2.246 2.174 2.1063.630 3.465 | 3.312 | 3.170 | 3.037 2.914 | 2.7984.452 4.212 3.993 | 3.791 | 3.605 3.433 3.274 3.127 2.9915.242 4.917 4.623 | 4.355 | 4.111 3.889 | 3.685 3.498 3.3266.002 5.582 | 5.206 4.868 | 4.564 4.288 4.039 | 3.812 3.6056.733 6.210 | 5.747 5.335 | 4.968 | 4.639 | 4.344 | 4.078 3.8377.435 6.802 | 6.247 | 5.759 | 5.328 4.946| 4.607 4.303 4.0318.111 7.360 | 6.710 | 6.145 | 5.650 5.216 | 4.833 4.494 4.19212342.69 2.58957910 Management is trying to decide whether or not to build a new factory. They believe sales areincreasing for their products. They have estimated revenues of $85,000 in year one, $70,000 inyears two through ten. In 10 years the factory is obsolete.They estimate expenses annually to operate the factory after year 1 would be $30,000.The cost of the new factory is $450,000. The payments required are $120,000 immediately withthe remainder due at completion.The company has hurdle rate of 10%.Use these tables to solve the problems.a. What is the net present value of this new factory?b. What would the net present value be if the factory only produces goods for 9 years?

Here, Revenues for 1st year = $85,000 Revenues for 2nd year = $70,000 Annual expenses = $30,000…

Management is trying to decide whether or not to build a new factory. They believe sales are increasing for their products. They have estimated revenues of $85,000 in year one, $70,000 in years two through ten. In 10 years the factory is obsolete. They estimate expenses annually to operate the factory after year 1 would be $30,000. The cost of the new factory is $450,000. The payments required are $120,000 immediately with the remainder due at completion. The company has hurdle rate of 10%. Use these tables to solve the problems. a. What is the net present value of this new factory? b. What would the net present value be if the factory only produces goods for 9 years?

Management is trying to decide whether or not to build a new factory. They believe sales are increasing for their products. They have estimated revenues of $85,000 in year one, $70,000 in years two through ten. In 10 years the factory is obsolete. They estimate expenses annually to operate the factory after year 1 would be $30,000. The cost of the new factory is $450,000. The payments required are $120,000 immediately with the remainder due at completion. The company has hurdle rate of 10%. Use these tables to solve the problems. a. What is the net present value of this new factory? b. What would the net present value be if the factory only produces goods for 9 years?

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter26: Capital Budgeting (capbud)

Section: Chapter Questions

Problem 1R

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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?
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 companys tax rate is 40%. a. What is the initial investment outlay? b. The company spent and expensed 150,000 on research related to the new product last year. Would this change your answer? Explain. c. 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. How would this affect your answer?
Thaler Company bought 26,000 of raw materials a year ago in anticipation of producing 5,000 units of a deluxe version of its product to be priced at 75 each. Now the price of the deluxe version has dropped to 35 each, and Thaler is now deciding whether to produce 1,500 units of the deluxe version at a cost of 48,000 or to scrap the project. What is the opportunity cost of this decision? a. 175,000 b. 375,000 c. 48,000 d. 26,000
Nico Parts, Inc., produces electronic products with short life cycles (of less than two years). Development has to be rapid, and the profitability of the products is tied strongly to the ability to find designs that will keep production and logistics costs low. Recently, management has also decided that post-purchase costs are important in design decisions. Last month, a proposal for a new product was presented to management. The total market was projected at 200,000 units (for the two-year period). The proposed selling price was 130 per unit. At this price, market share was expected to be 25 percent. The manufacturing and logistics costs were estimated to be 120 per unit. Upon reviewing the projected figures, Brian Metcalf, president of Nico, called in his chief design engineer, Mark Williams, and his marketing manager, Cathy McCourt. The following conversation was recorded: BRIAN: Mark, as you know, we agreed that a profit of 15 per unit is needed for this new product. Also, as I look at the projected market share, 25 percent isnt acceptable. Total profits need to be increased. Cathy, what suggestions do you have? CATHY: Simple. Decrease the selling price to 125 and we expand our market share to 35 percent. To increase total profits, however, we need some cost reductions as well. BRIAN: Youre right. However, keep in mind that I do not want to earn a profit that is less than 15 per unit. MARK: Does that 15 per unit factor in preproduction costs? You know we have already spent 100,000 on developing this product. To lower costs will require more expenditure on development. BRIAN: Good point. No, the projected cost of 120 does not include the 100,000 we have already spent. I do want a design that will provide a 15-per-unit profit, including consideration of preproduction costs. CATHY: I might mention that post-purchase costs are important as well. The current design will impose about 10 per unit for using, maintaining, and disposing our product. Thats about the same as our competitors. If we can reduce that cost to about 5 per unit by designing a better product, we could probably capture about 50 percent of the market. I have just completed a marketing survey at Marks request and have found out that the current design has two features not valued by potential customers. These two features have a projected cost of 6 per unit. However, the price consumers are willing to pay for the product is the same with or without the features. Required: 1. Calculate the target cost associated with the initial 25 percent market share. Does the initial design meet this target? Now calculate the total life-cycle profit that the current (initial) design offers (including preproduction costs). 2. Assume that the two features that are apparently not valued by consumers will be eliminated. Also assume that the selling price is lowered to 125. a. Calculate the target cost for the 125 price and 35 percent market share. b. How much more cost reduction is needed? c. What are the total life-cycle profits now projected for the new product? d. Describe the three general approaches that Nico can take to reduce the projected cost to this new target. Of the three approaches, which is likely to produce the most reduction? 3. Suppose that the Engineering Department has two new designs: Design A and Design B. Both designs eliminate the two nonvalued features. Both designs also reduce production and logistics costs by an additional 8 per unit. Design A, however, leaves post-purchase costs at 10 per unit, while Design B reduces post-purchase costs to 4 per unit. Developing and testing Design A costs an additional 150,000, while Design B costs an additional 300,000. Assuming a price of 125, calculate the total life-cycle profits under each design. Which would you choose? Explain. What if the design you chose cost an additional 500,000 instead of 150,000 or 300,000? Would this have changed your decision? 4. Refer to Requirement 3. For every extra dollar spent on preproduction activities, how much benefit was generated? What does this say about the importance of knowing the linkages between preproduction activities and later activities?
I know that its the thing to do, insisted Pamela Kincaid, vice president of finance for Colgate Manufacturing. If we are going to be competitive, we need to build this completely automated plant. Im not so sure, replied Bill Thomas, CEO of Colgate. The savings from labor reductions and increased productivity are only 4 million per year. The price tag for this factoryand its a small oneis 45 million. That gives a payback period of more than 11 years. Thats a long time to put the companys money at risk. Yeah, but youre overlooking the savings that well get from the increase in quality, interjected John Simpson, production manager. With this system, we can decrease our waste and our rework time significantly. Those savings are worth another million dollars per year. Another million will only cut the payback to about 9 years, retorted Bill. Ron, youre the marketing managerdo you have any insights? Well, there are other factors to consider, such as service quality and market share. I think that increasing our product quality and improving our delivery service will make us a lot more competitive. I know for a fact that two of our competitors have decided against automation. Thatll give us a shot at their customers, provided our product is of higher quality and we can deliver it faster. I estimate that itll increase our net cash benefits by another 2.4 million. Wow! Now thats impressive, Bill exclaimed, nearly convinced. The payback is now getting down to a reasonable level. I agree, said Pamela, but we do need to be sure that its a sound investment. I know that estimates for construction of the facility have gone as high as 48 million. I also know that the expected residual value, after the 20 years of service we expect to get, is 5 million. I think I had better see if this project can cover our 14% cost of capital. Now wait a minute, Pamela, Bill demanded. You know that I usually insist on a 20% rate of return, especially for a project of this magnitude. Required: 1. Compute the NPV of the project by using the original savings and investment figures. Calculate by using discount rates of 14% and 20%. Include salvage value in the computation. 2. Compute the NPV of the project using the additional benefits noted by the production and marketing managers. Also, use the original cost estimate of 45 million. Again, calculate for both possible discount rates. 3. Compute the NPV of the project using all estimates of cash flows, including the possible initial outlay of 48 million. Calculate by using discount rates of 14% and 20%. 4. CONCEPTUAL CONNECTION If you were making the decision, what would you do? Explain.
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
Poleski Manufacturing, which maintains the same level of inventory at the end of each year, provided the following information about expenses anticipated for next year: The selling price of Poleskis single product is 16. In recent years, profits have fallen and Poleskis management is now considering a number of alternatives. Poleski wants to have a net income next year of 250,000, but expects to sell only 120,000 units unless some changes are made. The president of Poleski has asked you to calculate the companys projected net income (assuming 120,000 units are sold) and the sales needed to achieve the companys net income objective for next year. Also, compute Poleskis contribution margin per unit, contribution margin ratio, and break-even point for next year. The worksheet CVP has been provided to assist you. Note that the data from the problem have already been entered into the Data Section of the worksheet.