Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product: Expected annual revenues: $750,000 Projected product life cycle: five years Equipment: $800,000 with a salvage value of $100,000 after five years Expected increase in working capital: $100,000 (recoverable at the end of five years) Annual cash operating expenses: estimated at $450,000 Required rate of return: 8 percent Required: 1. Estimate the annual cash flows for the new product. 2. Using the estimated annual cash flows, calculate the NPV. 3. What if revenues were overestimated by $150,000? Redo the NPV analysis, correcting for this error. Assume the operating expenses remain the same.

BuyFind

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
BuyFind

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

Solutions

Chapter 19, Problem 3CE
Textbook Problem

Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product:

  • Expected annual revenues: $750,000
  • Projected product life cycle: five years
  • Equipment: $800,000 with a salvage value of $100,000 after five years
  • Expected increase in working capital: $100,000 (recoverable at the end of five years)
  • Annual cash operating expenses: estimated at $450,000
  • Required rate of return: 8 percent

Required:

  1. 1. Estimate the annual cash flows for the new product.
  2. 2. Using the estimated annual cash flows, calculate the NPV.
  3. 3. What if revenues were overestimated by $150,000? Redo the NPV analysis, correcting for this error. Assume the operating expenses remain the same.

Expert Solution

Want to see the full answer?

Check out a sample textbook solution.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Chapter 19 Solutions

Cornerstones of Cost Management (Cornerstones Series)
Ch. 19 - What are the principal tax implications that...Ch. 19 - Explain why the MACRS method of recognizing...Ch. 19 - Explain the important factors to consider for...Ch. 19 - Explain what a postaudit is and how it can provide...Ch. 19 - Explain what sensitivity analysis is. How can it...Ch. 19 - Jan Booth is considering investing in either a...Ch. 19 - WeCare Clinic is planning on investing in some new...Ch. 19 - Carsen Sorensen, controller of Thayn Company, just...Ch. 19 - Manzer Enterprises is considering two independent...Ch. 19 - Keating Hospital is considering two different...Ch. 19 - Warren Company plans to open a new repair service...Ch. 19 - Each of the following scenarios is independent....Ch. 19 - The following cases are each independent of the...Ch. 19 - Each of the following scenarios is independent....Ch. 19 - Roberts Company is considering an investment in...Ch. 19 - NPV A clinic is considering the possibility of two...Ch. 19 - Refer to Exercise 19.11. 1. Compute the payback...Ch. 19 - Buena Vision Clinic is considering an investment...Ch. 19 - Consider each of the following independent cases....Ch. 19 - Gina Ripley, president of Dearing Company, is...Ch. 19 - Covington Pharmacies has decided to automate its...Ch. 19 - Postman Company is considering two independent...Ch. 19 - Lilly Company is planning to buy a set of special...Ch. 19 - An investment of 2,000 produces a net cash flow of...Ch. 19 - Which of the following is a deficiency of the...Ch. 19 - Assume there are two competing projects, X and Y....Ch. 19 - Thomas Company is investing 10,000 in a project...Ch. 19 - Assume that an investment of 100,000 produces a...Ch. 19 - Heaps Company produces jewelry that requires...Ch. 19 - Sweeney Manufacturing has a plant where the...Ch. 19 - Ron Booth, the CEO for Sunders Manufacturing, was...Ch. 19 - Kent Tessman, manager of a Dairy Products...Ch. 19 - Friedman Company is considering installing a new...Ch. 19 - Okmulgee Hospital (a large metropolitan for-profit...Ch. 19 - Mallette Manufacturing, Inc., produces washing...Ch. 19 - Jonfran Company manufactures three different...Ch. 19 - Brindon Thayn, president and owner of Orangeville...

Additional Business Textbook Solutions

Find more solutions based on key concepts
What is the OLAP operation of drill-down?

Accounting Information Systems

How should the capital structure weights used to calculate the WACC be determined?

Fundamentals of Financial Management, Concise Edition (MindTap Course List)

List the three steps followed under the gross profit method of estimating inventory.

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)

FREE CASH FLOW Financial information for Powell Panther Corporation is shown here. Powell Panther Corporation: ...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

In what way is a college degree a form of capital?

Principles of Macroeconomics (MindTap Course List)

Are employee benefits really necessary? Why?

Foundations of Business (MindTap Course List)

Should the United States attempt to reduce air and water pollution to zero? Why or why not?

Microeconomics: Private and Public Choice (MindTap Course List)

What is the index of leading indicators? Why is it useful to macro policy-makers?

Economics: Private and Public Choice (MindTap Course List)