Concept explainers
To answer the next three questions, refer to the following example. In 2003, Porsche unveiled its new sports utility vehicle (SUV), the Cayenne. With a price tag of over $40,000, the Cayenne goes from zero to 62 mph in 8.5 seconds. Porsche's decision to enter the SUV market was in response to the runaway success of other high-priced SUVs such as the Mercedes-Benz M class. Vehicles in this class had generated years of very high profits. The Cayenne certainly spiced up the market, and, in 2006, Porsche introduced the Cayenne Turbo S, which goes from zero to 60 mph in 4.8 seconds and has a top speed of 168 mph. The base price for the Cayenne Turbo S in 2014? Almost $115,000
Some analysts questioned Porsche’s entry into the luxury SUV market. The analysts were concerned because not only was Porsche a late entry into the market but also the introduction of the Cayenne might damage Porsche’s reputation as a maker of high-performance automobiles.
12. Capital Budgeting In evaluating the Cayenne, what do you think Porsche needs to assume regarding the substantial profit margins that exist in this market? Is it likely that they will be maintained as the market becomes more competitive, or will Porsche be able to maintain the profit margin because of its image and the performance of the cayenne?
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CORPORATE FINANCE - CONNECT ACCESS
- The Chromosome Manufacturing Company produces two products, X and Y. The company president, Gene Mutation, is concerned about the fierce competition in the market for product X. He notes that competitors are selling X for a price well below Chromosome's price of P12.70. At the same time, he notes that competitors are pricing product Y almost twice as high as Chromosome's price of P12.50. Mr. Mutation has obtained the following data for a recent time period: PRODUCT X PRODUCT Y Number of Units 11,000 3,000 Direct Materials Cost Per Unit 3.23 3.09 Direct Labor Cost Per Unit 2.22 2.10 Direct Labor Hours 10,000 2,500 Machine Hours 2,100 2,800 Inspection Hours 80 100 Purchase Orders 10 10 Mr. Mutation has learned that overhead costs are assigned to products on the basis of direct labor hours. The overhead costs for his time period consisted of the following items: Overhead Cost Item Amount Inspecting Costs…arrow_forward3. Jiang Technology (JT), Inc. has just developed a new commercial dishwasher that has auto-sensor and self-cleaning functionalities. JT plans to target large restaurants and wants to determine what prices to charge for its new dishwasher JT-1000. In the large restaurant customer segment, the commercial dishwasher with the largest market share is General Electric's DW-1990 model, which is priced at $5000. DW-1990 dishwasher requires the restaurants to do maintenance service every 6 months; each maintenance will cost the restaurants $150 (for parts and labor). The maintenance service for JT-1000 will cost the restaurants $200 every 9 months. JT's dishwasher uses 10% less water and electricity than the DW-1990 dishwasher. The average water and electricity cost associated with the use of a DW-1990 dishwasher is $1200 a year. Assume that large restaurants will use a DW- 1990 dishwasher for 12 years before replacing it; at the end of the 12-year usage period, a well- maintained DW-1990's…arrow_forwardA company pays a sales representative 0.50 $ per kilometer in return for using its own car for company works. However, the company is considering another solution for this situation. So much so that the company will buy a car and make the car available to its representative. The data for this solution are as follows: The cost of buying such a car is 24,000 $ and it has a service life of 5 years. The market value at the end of this life is 7,000 $. The cost of keeping the car in a garage when it is not running is 2,500 $ per year, and the total fuel-tyre-maintenance costs are 0.30 $ per kilometer. If the interest rate is 15%, how many kilometers must the sales representative travel so that the costs of both methods are equal (break-even)? (please explain) a) 42.356 b) 43.107 c) 44.226 d) 45.340arrow_forward
- Hybrid cars are touted as a "green" alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2019 Toyota RAV4 Hybrid, which had a list price of $5,900 (including tax consequences) more than the comparable gasoline-only SUV. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $250 more than the gasoline-only model. The EPA mileage estimate was 39 mpg for the hybrid and 30 mpg for the gasoline-only SUV a. Assume that gasoline costs $2.85 per gallon and you plan to keep either car for six years. How many miles per year would you need to drive to make the decision to buy the hybrid worthwhile, ignoring the time value of money? (Do not round intermediate calculations and round your answer to nearest whole number, e.g., 32.) b. If you drive 15,000 miles per year and keep either car for six years, what price per gallon would make the decision to buy the hybrid worthwhile, ignoring the time value of money? (Do not…arrow_forwardStereo Stereo Inc. (SSI) has manufactures only one model of Stereo, the Jack. It is known for its high class audio quality and surprising light weight! It comes in red, green, and purple. It is a very good product and was recently endorsed by Madonna. This year, SSI expects to make and sell 21,100 Jacks. It is expected to be a very good year due to the latest fad of people listening to music at home, instead of attending concerts. Fixed administrative costs are expected to total $533,000 and fixed manufacturing costs are expected to total $297,000. Financial information relating to the product for this year is provided below. Financial details per unit: $494 39 30 112 214 Selling price Variable selling cost Variable overhead cost Direct labour cost Direct material cost Required: Calculate SSI's expected margin of safety in units for this year.arrow_forwardAssume that a person's income directly affects their purchasing power for a particular product. We have a customer named John who has a per capita income of $35,102 that is looking to buy a new car. If the current US population is 335,707,897, the current per capita income is $40,363, and total new car sales in 2022 were $1,131,009,556,950; what would John's per capita spend be for a new car, assuming his income directly affects the amount he can spend?arrow_forward
- ero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet demand for a new line of solar charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features; • The firm just spent $300,000 for marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $26,891,937 (excluding land, hint: land is not subject to depreciation). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) • The company’s operating cost (not including depreciation) will equal 50% of sales. • The company’s tax rate is 35 percent. • Use a 10-year straight-line depreciation…arrow_forwardA company is trying to decide whether to buy a new delivery truck to replace their old one. The old truck originally cost $32,000. The new truck will cost $45,000. If they buy the new truck, they will sell the old truck to a used truck dealer for $4,000. Based on the information given, what is the immediate total incremental cost or benefit of buying the new truck? (Indicate a net benefit as a positive number and a net cost as a negative number.)arrow_forwardAero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features:• The firm just spent $300,000 for a marketing study to determine consumer demand (@ t=0).• Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,895,180.• The project has an initial cost of $ 20000000 excluding land, hint: the land is notsubject to depreciation).• If the project is undertaken, at t=0 the company will need to increase its inventories by $3,500,000, accounts receivable by $ 1500000 and its accounts payable by $2,000,000. This net operating working capital will be recovered at the end of the project's life (t = 10).• If the project is undertaken, the company will realize an additional $8,000,000…arrow_forward
- Tesla’s decision to produce a new line of compact and full sized cars resulted in the need to construct either a small plant or a large plant. The best selection of plant size depends on how the marketplace reacts to the new product line. To conduct an analysis, marketing management has decided to view the possible long-run demand as low, medium, or high. The following payoff table shows the projected profit in millions of dollars: Long Run Demand Plant size Low Medium High Small 80 200 350 Large 120 180 190 Construct an influence diagram. Construct a decision tree. Recommend a decision based on the use of the optimistic, conservative, and minimax regret approaches.arrow_forwardAero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar- charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features; The firm just spent $300,000 for a marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $20,000,000 (excluding land, hint: the land is not subject to depreciation). • If the project is undertaken, at t = 0 the company will need to increase its inventories by $3,500,000, accounts receivable by $1,500,000, and its accounts payable by $2,000,000. This net operating working capital will be recovered at the end of the project's life (t = 10). • If the project is undertaken, the company will realize an additional…arrow_forwardIn keeping with the increasingly popular merchandising theme of customization an entrepreneurial engineer started a business making customized bobblehead dolls. He entered into a contract with Binkely Toys, Inc. the maker of the dolls to purchase bobbleheads in lots of 250 for $2500. If the engineers initial investment was $59,000 and his profit was $37.000 in year 1 and $47.000 in year 2. his rate of return was closest to Select one: a 18% b. 21% c 20 d. 32%arrow_forward
- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning