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 5 -year period, and 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.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question
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 5 -year period, and
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 5% 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.
Transcribed Image Text: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 5 -year period, and 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 5% 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.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Product life cycle
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education