J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $7,600, including a set of eight chairs. The company feels that sales will be 2,050, 2,200, 2,750, 2,600, and 2,350 sets per year for the next five years, respectively. Variable costs will amount to 49 percent of sales and fixed costs are $1.94 million per year. The new dining room table sets will require inventory amounting to 7 percent of sales, produced and stockpiled in the year prior to sales. It is believed that the addition of the new table will cause a loss of sales of 450 dining room table sets per year of the oak tables the company produces. These tables sell for $4,900 and have variable costs of 44 percent of sales. The inventory for this oak table is also 7 percent of sales. The company believes that sales of the oak table will be discontinued after three years. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $17 million. However, the excess production capacity means the company can produce the new table without buying the new equipment. The company controller has said that the current excess capacity will end in two years with current production. This means that if the company uses the current excess capacity for the new table, it will be forced to spend the $17 million in two years to accommodate the increased sales of its current products. In five years, the new equipment will have a market value of $3.5 million if purchased today, and $7.1 million if purchased in two years. The equipment is depreciated on a seven-year MACRS schedule. The company has a tax rate of 25 percent, and the required return for the project is 13 percent. Refer to Table 8.3. Calculate the NPV of the new table. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $7,600, including a set of eight chairs. The company feels that sales will be 2,050, 2,200, 2,750, 2,600, and 2,350 sets per year for the next five years, respectively. Variable costs will amount to 49 percent of sales and fixed costs are $1.94 million per year. The new dining room table sets will require inventory amounting to 7 percent of sales, produced and stockpiled in the year prior to sales. It is believed that the addition of the new table will cause a loss of sales of 450 dining room table sets per year of the oak tables the company produces. These tables sell for $4,900 and have variable costs of 44 percent of sales. The inventory for this oak table is also 7 percent of sales. The company believes that sales of the oak table will be discontinued after three years. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $17 million. However, the excess production capacity means the company can produce the new table without buying the new equipment. The company controller has said that the current excess capacity will end in two years with current production. This means that if the company uses the current excess capacity for the new table, it will be forced to spend the $17 million in two years to accommodate the increased sales of its current products. In five years, the new equipment will have a market value of $3.5 million if purchased today, and $7.1 million if purchased in two years. The equipment is depreciated on a seven-year MACRS schedule. The company has a tax rate of 25 percent, and the required return for the project is 13 percent. Refer to Table 8.3. Calculate the NPV of the new table. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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| J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $7,600, including a set of eight chairs. The company feels that sales will be 2,050, 2,200, 2,750, 2,600, and 2,350 sets per year for the next five years, respectively. Variable costs will amount to 49 percent of sales and fixed costs are $1.94 million per year. The new dining room table sets will require inventory amounting to 7 percent of sales, produced and stockpiled in the year prior to sales. It is believed that the addition of the new table will cause a loss of sales of 450 dining room table sets per year of the oak tables the company produces. These tables sell for $4,900 and have variable costs of 44 percent of sales. The inventory for this oak table is also 7 percent of sales. The company believes that sales of the oak table will be discontinued after three years. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $17 million. However, the excess production capacity means the company can produce the new table without buying the new equipment. The company controller has said that the current excess capacity will end in two years with current production. This means that if the company uses the current excess capacity for the new table, it will be forced to spend the $17 million in two years to accommodate the increased sales of its current products. In five years, the new equipment will have a market value of $3.5 million if purchased today, and $7.1 million if purchased in two years. The equipment is |
|
Calculate the NPV of the new table. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
|
Transcribed Image Text:TABLE 8.3
Depreciation under Modified
Accelerated Cost Recovery
System (MACRS)
YEAR
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
3 YEARS
.3333
4445
.1481
.0741
RECOVERY PERIOD CLASS
7 YEARS
5 YEARS
.2000
3200
.1920
.1152
.1152
.0576
.1429
2449
.1749
.1249
0893
0892
0893
.0446
10 YEARS
.1000
.1800
.1440
.1152
.0922
.0737
.0655
.0655
.0656
.0655
.0328
15 YEARS
.0500
.0950
.0855
.0770
.0693
0623
.0590
.0590
.0591
.0590
.0591
.0590
.0591
.0590
.0591
.0295
20 YEARS
.03750
.07219
06677
.06177
.05713
05285
04888
.04522
.04462
.04461
.04462
.04461
.04462
04461
04462
.04461
.04462
.04461
.04462
.04461
.02231
Depreciation is expressed as a percent of the asset's cost. These schedules are based on the IRS publication 946. How to Depreciate Property
and other details on depreciation are presented later in the chapter. Note that five-year depreciation actually carries over six years because the
IRS assumes purchase is made in midyear.
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