Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division's return oninvestment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that wouldrequire a $4,700,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is19%. The project would provide net operating income each year for five years as follows:SalesVariable expensesContribution marginFixed expenses:Advertising, salaries, and other fixed out-of-pocket costsRequired:1. What is the project's net present value?DepreciationTotal fixed expensesNet operating incomeClick here to view Exhibit 148-1 and Exhibit 148-2, to determine the appropriate discount factor(s) using tables.$ 800,000940,0002. What is the project's internal rate of return to the nearest whole percent?3. What is the project's simple rate of return?4-a. Would the company want Casey to pursue this investment opportunity?4-b. Would Casey be inclined to pursue this investment opportunity?Answer is not complete.Complete this question by entering your answers in the tabs below.Req 1Req 4A$4,400,0002,000,0002,400,000Reg 2Reg 3What is the project's net present value? (Round your final answer to the nearest whole dollar amount.)Net present value $ 181,200Reg 481,740,000$660,000

"Since you have asked a question with sub-parts more than three, as per guidelines, the first three…

Answered: Casey Nelson is a divisional manager…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years for $583,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year’s forecast sales. The firm estimates production costs equal to $1.10 per trap and believes that the traps can be sold for $5 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm’s tax bracket is 40%, and the required rate of return on the project is 12%. Year: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps) 0 0.6 0.8 0.9 0.9 0.8 0.6 0 Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV?
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?…
Thunderbolt Corporation is considering an investment project to produce electric gadgets. Cathie Wood projected unit sales of these gadgets to be 10,000 in the first year, with growth of 6.5 percent each year over the subsequent five years (so the total project life is six years). Production of these gadgets will require $1,200,000 in net working capital to start. The net working capital will be recovered at the end of the project. Total fixed costs are $3,000,000 per year, variable production costs are $350 per unit, and the units are priced at $850 each. The equipment needed to begin production will cost $8,400,000. The equipment will be depreciated using the straight-line method over a six-year life and has a pre-tax salvage value of $520,000 when the project closes. The tax rate is 25%. a) Using Excel, set up a table that shows your detailed calculation with formulas of the project cash flows for each year throughout the life of the project.
A project requires an initial investment in equipment of $760,000 immediately (t=0) and is expected to produce sales revenue of $697, 000 the first year; this revenue will increase by 4.5% per year over the next four years. Manufacturing costs are estimated to be 67% of the sales. The project demand analysis, which was done last year, cost $235,000. The asset can be depreciated on a straight-line basis over five years to a zero salvage value. The corporate tax rate is 36%. The project requires an investment in working capital. Specifically, at the beginning of the project (t=0), $45,000 of working capital is required; thereafter, working capital is projected to be 6.0% of revenue. The investment in working capital will be recovered at the end of the fifth year. At the end of the 5th year, the company plans to sell the equipment for $18,900. To calculate the cost of capital for this project, the firm is going to use the following companies as comparable firms. Beta Debt Equity…
Your firm is contemplating the purchase of a new $540,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $68,000 at the end of that time. You will be able to reduce working capital by $93,000 (this is a one-time reduction). The tax rate is 21 percent and the required return on the project is 9 percent. If the pretax cost savings are $150,000 per year, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Will you accept or reject the project? Accept Reject If the pretax cost savings are $115,000 per year, what is the NPV of this project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Will you accept or reject the project? Reject Accept At what level of pretax cost savings would you be indifferent between accepting the…
Consider a project to supply Detroit with 27,000 tons of machine screws annually for automobile production. You will need an initial $6,000,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1,450,000 and that variable costs should be $275 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 6-year project life. It also estimates a salvage value of $825,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $392 per ton. The engineering department estimates you will need an initial net working capital investment of $580,000. You require a return of 11 percent and face a tax rate of 22 percent on this project. a-1. What is the estimated OCF for this project? (Do not round intermediate calculations. and round your answer to the nearest whole number,…
Consider a project to supply Detroit with 28,000 tons of machine screws annually for automobile production. You will need an initial $5,800,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1,400,000 and that variable costs should be $265 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 6-year project life. It also estimates a salvage value of $775,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $380 per ton. The engineering department estimates you will need an initial net working capital investment of $560,000. You require a return of 14 percent and face a tax rate of 25 percent on this project. a-1. What is the estimated OCF for this project? (Do not round intermediate calculations and round your answer to the nearest whole…
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. After careful study, Oakmont estimated the following costs and revenues for the new product: When the project concludes in four years the working capital will be released for investment elsewhere within the company. Required: Using Excel (this will save you time and effort) answer the following: Oakmont’s cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV. Same situation as (a), but management does feel this project does possess a greater than average risk, so 19% should be the required rate of return. Compute the NPV. Management is concerned that Sales Revenues and Expenses could be rising due to inflationary factors. So the projection for year 1 is as shown, but that sales revenues will grow by 2% per year for years 2-4; and that variable expenses will grow by 4% per year for years 2-4, and that fixed out-of-pocket operating…
Beacon Company is considering automating its production facility. The initial investment in automation would be $7.52 million, and the equipment has a useful life of 6 years with a residual value of $1,100,000. The company will use straight- line depreciation. Beacon could expect a production increase of 47,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Sales revenue Variable costs Direct materials Direct labor Variable manufacturing overhead Total variable manufacturing costs Contribution margin Fixed manufacturing costs Net operating income Required: 1-a. Complete the following table showing the totals. Current (no automation) 81,000 Proposed (automation) 128,000 units units Per Unit $94 $ 17 30 9 56 $38 Total $ ? ? 1,240,000 ? Per Unit $94 $ 17 ? 9 ? $44 Total $ ? ? 2,200,000 ?
Monica is a senior financial manager of Eclipse Ltd. She is conducting a capital budgeting analysis on a new product. She has already authorised an extensive market research on the marketability of the product that cost $15,000, which she paid yesterday. The new project is expected to generate yearly revenue of $390,000 for 4 years. The related variable costs are expected to be $100,000 p.a. and Monica estimates the relevant fixed costs would be another $30,000 p.a. The project will require the company to purchase new equipment at a cost of $500,000. The new equipment will be installed in a building which the company already owns but the building is currently left vacant. The company will depreciate the equipment by the straight-line method to zero salvage value over the 4 years and Monica believes that they can sell the equipment at the end of 4 years for $20,000. Eclipse Ltd’s required payback is 3 years and the required rate of return is 12% p.a. The relevant tax rate is 30% and tax…
Your IT company is working on a four-month project for a local mining company. The total planned value of the project (BAC) is $600,000. You are at the end of month three. By the end of month three you scheduled to spend $500,000(PV). The actual cost through this three-month mark is $450,000 (AC). The total work completed at the end of month three is 94 percent. Calculate the earned value, EV=
Cardinal Company is considering a project that would require a $2,782,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $200,000. The company’s discount rate is 18%. The project would provide net operating income each year as follows: Sales $ 2,873,000 Variable expenses 1,019,000 Contribution margin 1,854,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 754,000 Depreciation 516,400 Total fixed expenses 1,270,400 Net operating income $ 583,600 Required:If the equipment’s salvage value was $400,000 instead of $200,000, what would be the project’s simple rate of return? (Round your answer to 2 decimal places.)

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