A company, Ace Manufacturing, is considering a new product line and wants to conduct a full financial analysis to determine the feasibility of the project. The product requires an initial investment of $500,000 in machinery and $200,000 in working capital. The machinery will have a useful life of 5 years with no salvage value, and straight-line depreciation will be used. The company estimates that it will sell 50,000 units per year for $25 per unit. Variable costs are $15 per unit, and fixed annual costs (excluding depreciation) are $150,000. The company's tax rate is 30%, and it expects the required rate of return on investments to be 12%. Ace Manufacturing also expects to recover the full amount of working capital at the end of year 5. Calculate the annual net income before taxes. Calculate annual net cash flows after taxes. Compute the payback period. InnovateTech, a technology company, is considering expanding its product line to include a new smart home device. The project requires an initial investment of $1,000,000 in equipment and $300,000 in working capital. The equipment will have a useful life of 6 years with no salvage value, and the company will use straight-line depreciation. Innovate Tech estimates annual sales of 10,000 units, with a selling price of $150 per unit. Variable costs are projected to be $80 per unit, and fixed annual costs (excluding depreciation) will amount to $200,000. Additionally, the company expects annual advertising and administrative expenses of $100,000. The company's tax rate is 35%, and it requires a minimum return of 14% on new investments. At the end of the project (year 6), Innovate Tech expects to recover the full amount of working capital. Calculate the annual net income before taxes. Compute the annual net cash flow after taxes. Calculate the project's payback period.
A company, Ace Manufacturing, is considering a new product line and wants to conduct a full financial analysis to determine the feasibility of the project. The product requires an initial investment of $500,000 in machinery and $200,000 in working capital. The machinery will have a useful life of 5 years with no salvage value, and straight-line depreciation will be used. The company estimates that it will sell 50,000 units per year for $25 per unit. Variable costs are $15 per unit, and fixed annual costs (excluding depreciation) are $150,000. The company's tax rate is 30%, and it expects the required rate of return on investments to be 12%. Ace Manufacturing also expects to recover the full amount of working capital at the end of year 5. Calculate the annual net income before taxes. Calculate annual net cash flows after taxes. Compute the payback period. InnovateTech, a technology company, is considering expanding its product line to include a new smart home device. The project requires an initial investment of $1,000,000 in equipment and $300,000 in working capital. The equipment will have a useful life of 6 years with no salvage value, and the company will use straight-line depreciation. Innovate Tech estimates annual sales of 10,000 units, with a selling price of $150 per unit. Variable costs are projected to be $80 per unit, and fixed annual costs (excluding depreciation) will amount to $200,000. Additionally, the company expects annual advertising and administrative expenses of $100,000. The company's tax rate is 35%, and it requires a minimum return of 14% on new investments. At the end of the project (year 6), Innovate Tech expects to recover the full amount of working capital. Calculate the annual net income before taxes. Compute the annual net cash flow after taxes. Calculate the project's payback period.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 4P
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Transcribed Image Text:A company, Ace Manufacturing, is considering a new product line and wants to conduct a full
financial analysis to determine the feasibility of the project. The product requires an initial
investment of $500,000 in machinery and $200,000 in working capital. The machinery will
have a useful life of 5 years with no salvage value, and straight-line depreciation will be used.
The company estimates that it will sell 50,000 units per year for $25 per unit. Variable costs
are $15 per unit, and fixed annual costs (excluding depreciation) are $150,000. The company's
tax rate is 30%, and it expects the required rate of return on investments to be 12%. Ace
Manufacturing also expects to recover the full amount of working capital at the end of year 5.
Calculate the annual net income before taxes. Calculate annual net cash flows after taxes.
Compute the payback period. InnovateTech, a technology company, is considering expanding
its product line to include a new smart home device. The project requires an initial investment
of $1,000,000 in equipment and $300,000 in working capital. The equipment will have a useful
life of 6 years with no salvage value, and the company will use straight-line depreciation.
Innovate Tech estimates annual sales of 10,000 units, with a selling price of $150 per unit.
Variable costs are projected to be $80 per unit, and fixed annual costs (excluding depreciation)
will amount to $200,000. Additionally, the company expects annual advertising and
administrative expenses of $100,000. The company's tax rate is 35%, and it requires a
minimum return of 14% on new investments. At the end of the project (year 6), Innovate Tech
expects to recover the full amount of working capital. Calculate the annual net income before
taxes. Compute the annual net cash flow after taxes. Calculate the project's payback period.
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