Splish, a company that makes new furniture that has a worn look to it, has been struggling to keep up with its competitors. But the intern Igor has an idea: make some up-front investments in order to get customers' attention and then reap the rewards of a better product with a higher selling price. Since he's been studying capital budgeting at school, he's confident that he can present his idea and impress his boss with his insight and technical expertise. Here's the plan: Invest $146,000 in updated equipment and inventory management technology to support the production of zero-defect products, where custom features can be reasonably added to any order on demand. The new equipment and technology will have a useful life of 8 years, after which the assets will have no market value. The assets will generate additional net cash inflows due to higher gross margins of $59,900 per year for the life of the assets, less additional operating cash outflows of $29,200 per year for persistent marketing efforts. Before pulling his proposal together, Igor finds out that the company is typically subject to a 24% tax rate. Further, the company has alternative uses for its cash that would easily earn a 6% rate of return. Click here to view the factor table (a) Your answer is partially correct. Is Igor's plan financially viable? Determine the NPV of this proposal and explain what it means if your answer is either a negative or a positive amount. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 2 decimal places e.g. 5,125.36. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) NPV $ The planned investment looks The NPV is positive financially viable. which implies that the company will earn greater than a 6% return on the investment.
Splish, a company that makes new furniture that has a worn look to it, has been struggling to keep up with its competitors. But the intern Igor has an idea: make some up-front investments in order to get customers' attention and then reap the rewards of a better product with a higher selling price. Since he's been studying capital budgeting at school, he's confident that he can present his idea and impress his boss with his insight and technical expertise. Here's the plan: Invest $146,000 in updated equipment and inventory management technology to support the production of zero-defect products, where custom features can be reasonably added to any order on demand. The new equipment and technology will have a useful life of 8 years, after which the assets will have no market value. The assets will generate additional net cash inflows due to higher gross margins of $59,900 per year for the life of the assets, less additional operating cash outflows of $29,200 per year for persistent marketing efforts. Before pulling his proposal together, Igor finds out that the company is typically subject to a 24% tax rate. Further, the company has alternative uses for its cash that would easily earn a 6% rate of return. Click here to view the factor table (a) Your answer is partially correct. Is Igor's plan financially viable? Determine the NPV of this proposal and explain what it means if your answer is either a negative or a positive amount. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 2 decimal places e.g. 5,125.36. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) NPV $ The planned investment looks The NPV is positive financially viable. which implies that the company will earn greater than a 6% return on the investment.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter11: Determining The Cost Of Capital
Section: Chapter Questions
Problem 1MC: During the last few years, Jana Industries has been too constrained by the high cost of capital to...
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Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
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Transcribed Image Text:Splish, a company that makes new furniture that has a worn look to it, has been struggling to keep up with its competitors. But the
intern Igor has an idea: make some up-front investments in order to get customers' attention and then reap the rewards of a better
product with a higher selling price. Since he's been studying capital budgeting at school, he's confident that he can present his idea and
impress his boss with his insight and technical expertise. Here's the plan:
Invest $146,000 in updated equipment and inventory management technology to support the production of zero-defect
products, where custom features can be reasonably added to any order on demand.
(a)
The new equipment and technology will have a useful life of 8 years, after which the assets will have no market value.
The assets will generate additional net cash inflows due to higher gross margins of $59,900 per year for the life of the assets,
less additional operating cash outflows of $29,200 per year for persistent marketing efforts.
Before pulling his proposal together, Igor finds out that the company is typically subject to a 24% tax rate. Further, the company has
alternative uses for its cash that would easily earn a 6% rate of return.
Click here to view the factor table
Your answer is partially correct.
Is Igor's plan financially viable? Determine the NPV of this proposal and explain what it means if your answer is either a negative
or a positive amount. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 2 decimal places e.g.
5,125.36. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
NPV $
The planned investment looks
The NPV is positive
financially viable.
which implies that the company will earn
greater than
a 6% return on the investment.
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