Suppose that Calloway golf would like to capitalize on Phil Michelson winning the Open Championship in 2013 byreleasing a new putter. The new product will require new equipment for $404,186.00 that will be depreciated usingthe 5-year MACRS schedule. The project will run for 2 years with the following forecasted numbers:Putter priceUnits soldCOGSSelling and AdministrativeYear 1What is the NPV of the project?$64.2618,803.0041.00% of sales20.00% of salesYear 2$64.2611,756.0041.00% of sales20.00% of salesCalloway has a 13.00% cost of capital and a 36.00% tax rate. The firm expects to sell the equipment after 2 yearsfor a NSV of $161,131.00.

NPV is also known as Net Present Value.. It is a capital budgeting technique which helps in decision…

Answered: Suppose that Calloway golf would like…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 17EA: Gardner Denver Company is considering the purchase of a new piece of factory equipment that will...

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Suppose that Calloway golf would like to capitalize on Phil Michelson winning the Open Championship in 2013 by releasing a new putter. The new product will require new equipment for $421,096.00 that will be depreciated using the 5-year MACRS schedule. The project will run for 2 years with the following forecasted numbers: Year 1 Year 2 Putter price $60.58 $60.58 Units sold 18, 005.00 10, 527.00 COGS 38.00% of sales 38.00% of sales Selling and Administrative 20.00% of sales 20.00% of sales Calloway has a 14.00% cost of capital and a 38.00% tax rate. The firm expects to sell the equipment after 2 years for a NSV of $156, 433.00. What is the project cash flow for year 2? (include the terminal cash flow here) Submit Answer format: Currency: Round to: 2 decimal places.
Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 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.
Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated revenue producing lite of 4 years. Mason has a required rate of return that is 12% and a cost of capital of 11%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NP of the assembler if the required rate of return is 12%. Show calculation. Would you accept/reject a project based on NPV decision criteria? Why? Based on NPV calculated in part A, determine Profitability Index (PI). Show calculation. Would you accept/reject a project based on PI decision criteria? Why?
K Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.98 million. The product is expected to generate profits of $1.09 million per year for 10 years. The company will have to provide product support expected to cost $98,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year. a. What is the NPV of this investment if the cost of capital is 5.6%? Should the firm undertake the project? Repeat the analysis for discount rates of 1.6% and 14.5%, respectively. b. What is the IRR of this investment opportunity? c. What does the IRR rule indicate about this investment? a. What is the NPV of this investment if the cost of capital is 5.6%? Should the firm undertake the project? Repeat the analysis for discount rates of 1.6% and 14.5%, respectively. If the cost of capital is 5.6%, the NPV will be $ (Round to the nearest dollar.) Should the firm undertake the project? (Select the best choice…
A company is considering expanding a factory. The expansion requires 400 MUSD investment immediately. It should generate 117 MUSD tax adjusted cash flow each year for 7 years. The factory can be scrapped for 360 at the end of its lifetime. The firm's cost c capital is 19%. 1. Compute the NPV of the project. MUSD 2. Compute the projects Profitability Index. Answer: 3. Estimate the Discounted Payback Period (0 means it doesn't break even): 4. Estimate the Break-Even Period (0 means it doesn't break even):
Your company is considering undertaking a project to expand an existing product line. The required rate of return on the project is 8% and the maximum allowable payback period is 3 years. Time 0 1 2 3 4 5 6 Cash Flow $(10,000) $2,400 $4,800 $3,200 $3,200 $2,800 $2,400 Questions Evaluate the project using the following method. Simple Rate of Return should the project be accepted or rejected?
One oil company is considering 5 pipe sizes for a new pipeline. The costs for each of them are given below. Assuming that all the pipelines will last 15 years and that the company's minimum acceptable rate of return (MAAR) is 18% per year, determine which pipe size can be used based on A) present value method and B) incremental rate of return method. Tube size in mm 140 160 200 240 300 Initial inversion $9180 $10510 $13180 $15850 $30530 Installation Cost $600 $800 $1400 $1500 $2000 Annual Cost Opperation $6000 $5800 $5200 $4900 $4800
Consider a 200,000 SF office building complex, with NOI of $25/SF/year with rents and operating expenses paid in arrears (at the end of the year) annually, and no capital expenditures. The rent will increase by 3% per year. The discount rate is 10%/year. a. What is the value of this office building, assuming that the building is sold at the end of year 10 and the cap rate at that time is expected to be 10%? What is the cap rate at time 0? b. What is the value of this office building, assuming that the building will be held and rented indefinitely (perpetually)? What is the implied cap rate at time 0? c. What is the value if the rents are paid in advance (at the beginning of the year) and the building is rented perpetually?

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