ESSENTIALS OF CORPORATE FINANCE
17th Edition
ISBN: 9781260665857
Author: Ross
Publisher: MCG CUSTOM
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 9, Problem 2QP
Relevant Cash Flows. Winnebagel Corp. currently sells 28,000 motor homes per year at $77,000 each and 7,000 luxury motor coaches per year at $120,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 29,000 of these campers per year at $23,500 each. An independent consultant has determined that if the company introduces the new campers, it should boost the sales of its existing motor homes by 2,500 units per year and reduce the sales of its motor coaches by 750 units per year. What is the amount to use as the annual sales figure when evaluating this project? Why?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
es
eEgg is considering the purchase of a new distributed network computer system to help handle Its warehouse Inventories. The system
costs $55,000 to purchase and install and $32,000 to operate each year. The system is estimated to be useful for 4 years.
Management expects the new system to reduce the cost of managing Inventories by $60,000 per year. The firm's cost of capital
(discount rate) is 10%.
Required:
1. What is the net present value (NPV) of the proposed Investment under each of the following Independent situations? (Use the
appropriate present value factors from Appendix C, TABLE 1 and Appendix C. TABLE 2.)
1a. The firm is not yet profitable and therefore pays no income taxes.
1b. The firm is in the 22% Income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules
do not apply.
1c. The firm is in the 22% Income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a
four-year life, the DDB…
eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $60,000 to purchase and install and $30,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $62,000 per year. The firm’s cost of capital (discount rate) is 10%.
Required:
1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the appropriate present value factors from Appendix C, TABLE 1 and Appendix C, TABLE 2.)
1a. The firm is not yet profitable and therefore pays no income taxes.
1b. The firm is in the 30% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply.
1c. The firm is in the 30% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB…
Rose Apothecary is considering expanding its business to include a second store. David Rose, the CEO, believes that a marketing study would help to determine the overall demand for the store.
Part A: Without the marketing study, the company estimates that there will be an up-front cost of $100,000 to get the new store up and running. The expectation is that there is a 50% chance that the store will generate annual cash flows of $48,000 per year for the subsequent four years and a 50% chance that the store will generate annual cash flows of $22,000 per year for the subsequent four years. What is the NPV of the store expansion project, assuming a 15% cost of capital?
Chapter 9 Solutions
ESSENTIALS OF CORPORATE FINANCE
Ch. 9.1 - Prob. 9.1ACQCh. 9.1 - What is the stand-alone principle?Ch. 9.2 - Prob. 9.2ACQCh. 9.2 - Prob. 9.2BCQCh. 9.2 - Explain why interest paid is not a relevant cash...Ch. 9.3 - What is the definition of project operating cash...Ch. 9.3 - In the shark attractant project, why did we add...Ch. 9.3 - Prob. 9.3CCQCh. 9.4 - Prob. 9.4ACQCh. 9.4 - How is depreciation calculated for fixed assets...
Ch. 9.5 - Prob. 9.5ACQCh. 9.5 - What are some potential sources of value in a new...Ch. 9.6 - What are scenario and sensitivity analyses?Ch. 9.6 - Prob. 9.6BCQCh. 9.7 - Why do we say that our standard discounted cash...Ch. 9.7 - What are managerial options in capital budgeting?...Ch. 9.7 - Prob. 9.7CCQCh. 9 - Prob. 9.1CCh. 9 - Section 9.2What are sunk costs?Ch. 9 - Prob. 9.3CCh. 9 - Section 9.4If a firms current assets are 150,000,...Ch. 9 - A project has a positive NPV. What could drive...Ch. 9 - If a firms variable cost per unit estimate used in...Ch. 9 - Section 9.7Capital rationing exists when a company...Ch. 9 - Opportunity Cost. In the context of capital...Ch. 9 - Depreciation. Given the choice, would a firm...Ch. 9 - Prob. 3CTCRCh. 9 - Stand-Alone Principle. Suppose a financial manager...Ch. 9 - Prob. 5CTCRCh. 9 - Capital Budgeting Considerations. A major college...Ch. 9 - Prob. 7CTCRCh. 9 - Prob. 8CTCRCh. 9 - Prob. 9CTCRCh. 9 - Sensitivity Analysis and Scenario Analysis. What...Ch. 9 - LO19.11Marginal Cash Flows. A co-worker claims...Ch. 9 - Prob. 12CTCRCh. 9 - Forecasting Risk. What is forecasting risk? In...Ch. 9 - Options and NPV. What is the option to abandon?...Ch. 9 - Prob. 1QPCh. 9 - Relevant Cash Flows. Winnebagel Corp. currently...Ch. 9 - Prob. 3QPCh. 9 - Calculating OCF. Consider the following income...Ch. 9 - Calculating Depreciation. A piece of newly...Ch. 9 - Prob. 6QPCh. 9 - Prob. 7QPCh. 9 - Calculating Project OCF. Rolston Music Company is...Ch. 9 - Calculating Project OCF. H. Cochran, Inc., is...Ch. 9 - Calculating Project NPV. In the previous problem,...Ch. 9 - Calculating Project Cash Flow from Assets. In the...Ch. 9 - NPV and Modified ACRS. In the previous problem,...Ch. 9 - Project Evaluation. Kolbys Korndogs is looking at...Ch. 9 - Project Evaluation. Your firm is contemplating the...Ch. 9 - Project Evaluation. In the previous problem,...Ch. 9 - Prob. 16QPCh. 9 - Prob. 17QPCh. 9 - Sensitivity Analysis. We are evaluating a project...Ch. 9 - Prob. 19QPCh. 9 - Prob. 20QPCh. 9 - Cost-Cutting Proposals. CSM Machine Shop is...Ch. 9 - Sensitivity Analysis. Consider a three-year...Ch. 9 - Project Analysis. You are considering a new...Ch. 9 - Project Analysis. McGilla Golf has decided to sell...Ch. 9 - Project Evaluation. Aria Acoustics, Inc. (AAI),...Ch. 9 - Prob. 26QPCh. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...Ch. 9 - Conch Republic Electronics Conch Republic...
Knowledge Booster
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
- eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $60,000 to purchase and install and $30,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $62,000 per year. The firm's cost of capital (discount rate) is 9%. Required: 1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the appropriate present value factors from Appendix C. TABLE 1 and Appendix C. TABLE 2.) 1a. The firm is not yet profitable and therefore pays no income taxes. 1b. The firm is in the 25% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 25% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB…arrow_forwardA sports nutrition company is examining whether a new high-performance sports drink should be added to its product line. A preliminary feasibility analysis indicated that the company would need to invest $1 7.5 million in a new manufacturing facility to produce and package the product. A financial analysis using sales and cost data supplied by marketing and production personnel indicated that the net cash flow (cash inflows minus cash outflows) would be $6.1 million in the first year of commercialization, $7.4 million in year 2, $7 .0 million in year 3, and $ 5. 5 million in year 4. Senior company executives were undecided whether to move forward with the development of the new product. They requested that a discounted cash flow analysis be performed using two different discount rates: 20 percent and 15 percent. a. Should the company proceed with development of the product if the discount rate is 20 percent? Why? b. Does the decision to proceed with development of the product change if…arrow_forwardFirm Z has invested $4 million in marketing campaign to assess the demand for a product Manish. This product will be in the market next year and will last five years. Revenues are projected to be $50 million per year along with expenses of $20 million. The firm spends $15 million immediately and equipment that will be depreciated using MACRS depreciation 20. Additionally, it will use some fully depreciated existing equipment that has a market value of $4 million. Finally, minaj will have no incremental cash or inventory requirements. But receivables are expected to account for 15% of annual sales. Payables are expected to be 15% of the annual cost of goods sold between year one and four. All accounts payables and receivables will be settled at the end of your five. Based on this information and WACC in the first part of this question, find the NPV of the project. Identify the IRR of the project. Draw and PV versus our graph of the project. Will you accept this project? Why? Please show…arrow_forward
- Firm Z has invested $4 million in marketing campaign to assess the demand for a product Manish. This product will be in the market next year and will last five years. Revenues are projected to be $50 million per year along with expenses of $20 million. The firm spends $15 million immediately and equipment that will be depreciated using MACRS depreciation 20. Additionally, it will use some fully depreciated existing equipment that has a market value of $4 million. Finally, they will have no incremental cash or inventory requirements. But receivables are expected to account for 15% of annual sales. Payables are expected to be 15% of the annual cost of goods sold between year one and four. All accounts payables and receivables will be settled at the end of your five. Based on this information andCost of debt is 2.45%, cost of equity is 11%, cost of preferred stock is 5% and WACC is 5.42%., find the NPV of the project. Identify the IRR of the project. Will you accept this project? Why?…arrow_forwardA manufacturing company is considerign the purchase of new machinery to increase its production capacity. The company has identified a new machine that costs $500,000 and is expected to increase production by 20%. The company expects to sell the additional products for $600,000, resulting in a net profit of $100,000. The company can finance the purchase through a bank loan with an interest rate of 5% over a five year term. What is the expected return on investment (ROI) for the purchase of the new machinery 5% 10% 20% 25%arrow_forwardTodd Payne, the company’s operations manager, believes that the money should be used to expand the fleet of city vans at a cost of $730,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by $290,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $90,000. Operating the vans will require additional working capital of $32,000, which will be recovered at the end of the fourth year.In contrast, Oscar Vance, the company’s chief accountant, believes that the funds should be used to purchase large trucks to deliver the packages between the depots in the two cities. The conversion process would produce continuing improvement in operating savings and reduce cash outflows as follows. Year 1 Year 2 Year 3 Year 4 $161,000 $313,000 $402,000 $432,000 The large trucks…arrow_forward
- A manufacturing company is considering the purchase of new machinery to increase its production capacity. The company has identified a new machine that costs $500,000 and is expected to increase production by 20%. The company expects to sell the additional products for $600,000, resulting in a net profit of $100,000. The company can finance the purchase through a bank loan with an interest rate of 5% over a five-year term. What is the expected return on investment (ROI) for the purchase of the new machinery?arrow_forwardFirm Z has invested $4 million in marketing campaign to assess the demand for the product Minish. This product will be in the market next year and will last five years. Revenues are projected to be $50 million per year along with expenses of $20 million. The firm spends $15 million immediately on equipment that will be depreciated using MACRS depreciation to zero. Additionally, it will use some fully depreciated existing equipment that has a market value of $4 million. Finally, Minish will have no incremental cash or inventory requirements (products will be shipped directly from the contract manufacturer to customers). But, receivables are expected to account for 15% of annual sales. Payables are expected to be 15% of the annual cost of goods sold (COGS) between year 1 and year 4. All accounts payables and receivables will be settled at the end of year 5. Based on this information and WACC in the first part of the question, find the NPV of the project. Identify the IRR of the…arrow_forwardFirm Z has invested $4 million in marketing campaign to assess the demand for the product Minish. This product will be in the market next year and will last five years. Revenues are projected to be $50 million per year along with expenses of $20 million. The firm spends $15 million immediately on equipment that will be depreciated using MACRS depreciation to zero. Additionally, it will use some fully depreciated existing equipment that has a market value of $4 million. Finally, Minish will have no incremental cash or inventory requirements (products will be shipped directly from the contract manufacturer to customers). But, receivables are expected to account for 15% of annual sales. Payables are expected to be 15% of the annual cost of goods sold (COGS) between year 1 and year 4. All accounts payables and receivables will be settled at the end of year 5. Based on this information and WACC of 5.418, find the NPV of the project. Identify the IRR of the project. Draw NPV vs r graph of…arrow_forward
- Bensington Glass Co. is considering the expansion of it spandrel glass business line. They plan to convert an unused space of their warehouse into additional manufacturing space. They estimate the initial investment will be $9,050,000 and expect the new production to create additional cash flows of $4,165,000 in year's one through ten. If Bensington Glass uses a discount rate of 19%, what is the project's discounted payback period? 3.14 2.08 3.00 3.07arrow_forwardBlossom Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer- aided design and manufacturing machine for $420,000. The company believes that with this new machine it will improve productivity and increase quality, resulting in an increase in net annual cash flows of $102,155 for the next 6 years. Management requires a 10% rate of return on all new investments. Calculate the internal rate of return on this new machine. (Round answer to O decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Internal rate of return Should the investment be accepted?arrow_forwardeEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $50,000 to purchase and install and $32,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $58,000 per year. The firm’s cost of capital (discount rate) is 11%. a.The firm is not yet profitable and therefore pays no income taxes. b.The firm is in the 26% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. c. The firm is in the 26% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 × 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year. 1. What is the internal rate of return (IRR) of the proposed investment for…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Profitability index; Author: The Finance Storyteller;https://www.youtube.com/watch?v=Md5ocNqKHq8;License: Standard Youtube License