CSC is evaluating new project to produce encapsulators.The initial investment in plant and equipment is $500,000. Sales of encapsulators in year 1 are forecasted at $200,000 and costs at $100,000. Both are expected to increase by 10% a year. Profits are taxed at 30%. Working capital in each year consists of inventories of raw materials and is forecasted at 20% of sales in the following year. The project will last five years and the equipment at the end of this period will have scrap value of $50,000 but could be sold for $ 30,000. For tax purposes the equipment can be depreciated straight line over these years. Forecast cash flows from the project.

CSC is evaluating new project to produce encapsulators.The initial investment in plant and equipment is $500,000. Sales of encapsulators in year 1 are forecasted at $200,000 and costs at $100,000. Both are expected to increase by 10% a year. Profits are taxed at 30%. Working capital in each year consists of inventories of raw materials and is forecasted at 20% of sales in the following year. The project will last five years and the equipment at the end of this period will have scrap value of $50,000 but could be sold for $ 30,000. For tax purposes the equipment can be depreciated straight line over these years. Forecast cash flows from the project.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Q: Long live company is evaluating a project that produces 1,000 units of special pens per year…

A: Revenue per unit (Price): $20 (1 + 0.025) = $20.50 (considering 2.5% inflation)Cost per unit: $13 (1…

Q: A proposed capital project is expected to produce operating cash infl $123,000 per year for 4 years.…

A: NPV is also known as Net Present Value. It is a capital budegting technique which helps in decision…

Q: Conventional Corporation is evaluating a capital budgeting project that will generate $600,000 per…

A: YEAR CASH FLOW 0 $ (3,600,000.00) 1 $…

Q: Consider a capital expenditure project to purchase and install new equipment with an initial cash…

A: NPV is also known as Net Present Value.. It is a capital budgeting technique which helps in decision…

Q: Bellingham Bay Co. is assessing a new project, which will call for purchasing certain equipment at a…

A: Calculate annual operating cash flow (OCF). This considers EBT and taxes.OCF = EBT - TaxesOCF =…

Q: Your division is considering two investment projects, each of which requires an up-front expenditure…

A: The difference between the current value of cash inflows and outflow of cash over a period of time…

Q: Vicking Manufacturing Company is evaluating expanding their manufacturing facility. The expansion…

A: ROI is a measure that computes the efficiency of an investment project. It compares the actual or…

Q: Acme Food Co. Ltd. is considering the introduction of a new product Smackers. The firm has gathered…

A: NPV Net present value (NPV) is the present value of all cash inflows less the present value of cash…

Q: Finnegan Company plans to invest in a new operating plant that is expected to cost $762,500. The…

A: Formulas that are used:-

Q: Project Alpha requires an immediate investment of $16,000 and an additional investment of $12,000…

A: Net Present Value = Present Value of Cash Inflows - Present Value of Cash Outflows

Q: Albury Company is adding a new assembly line at a cost of $8.5 million. The company expects the…

A: Cost of capital = 16% Year Cash flow 0 -8500000 1 2000000 2 3000000 3 4000000 4…

Q: Innovation Company is thinking about marketing a new software product. Upfront costs to market and…

A: Net present value is defined as the difference between total cash inflows and total outflows. It…

Q: Pharoah Automotive is considering adding state safety inspections to its service offerings. The…

A: Solution given below Explanation:

Q: Better Mousetraps has developed a new trap. It can go into production for an initial investment in…

A: The project working capital requirement in any firm will carry the interest cost. This interest cost…

Q: project requires an initial investment in equipment of $99,000 and then requires an initial…

A: NPV of project is most used method of capital budgeting based on time value and can be found as the…

Q: The engineering team at Manuel’s Manufacturing, Inc., is planning to purchase an enterprise resource…

A: Vendor A Initial cost = $395,000 Incremental revenue = $110,000 Life, n = 4 years MARR, r = 8%…

Q: Calculate the NPV of this project if the interest rate is 6.91%

A: Net present value is determined by deducting the initial investment from the current value of cash…

Q: Better Mousetraps has developed a new trap. It can go into production for an initial investment in…

A: Part 2: Explanation:Step 1: Calculate the initial investment:Initial equipment cost = $6.3…

Q: Sunland Automotive is considering adding state safety inspections to its service offerings. the…

A: Modified internal rate of return (MIRR), which is the discounting rate that converts future cash…

Q: Haroldsen Corporation is considering a capital budgeting project that would require an initial…

A: Net present value is one of the project evaluation technique to analyze whether it is profitable.…

Q: Conventional Corporation is evaluating a capital budgeting project that will generate $600,000 per…

A: Computation:

Q: Better Mousetraps has developed a new trap. It can go into production for an initial investment in…

A: NPV It is a capital budgeting tool to evaluate a capital project and to decide whether the project…

Q: Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant…

A: Formulas:

Q: A new building project costs $40,000 and is expected to have positive cash inflows of $8,000 a year…

A: Formulas:

Q: Better Mousetraps has developed a new trap. It can go into production for an initial investment in…

A: Therefore, the net present value is $4,240,070.30.

Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

CSC is evaluating new project to produce
encapsulators.The initial investment in plant and
equipment is $500,000. Sales of encapsulators in year
1 are forecasted at $200,000 and costs at $100,000.
Both are expected to increase by 10% a year. Profits are
taxed at 30%. Working capital in each year consists of
inventories of raw materials and is forecasted at 20% of
sales in the following year. The project will last five
years and the equipment at the end of this period will
have scrap value of $50, 000 but could be sold for $
30,000. For tax purposes the equipment can be
depreciated straight line over these years. Forecast cash
flows from the project.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction to the cash flows

VIEW

Step 2: Computation of the forecasted cash flows:

VIEW

Step 3: Computation of the sales and changes in working capital

VIEW

Solution

VIEW

Step by step

Solved in 4 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $189,000 per year. Once in production, the bike is expected to make $283,500 per year for 10 years. Assume the cost of capital is 10%. a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? b. By how much must the cost of capital estimate deviate to change the decision? (Hint: Use Excel to calculate the IRR.) c. What is the NPV of the investment if the cost of capital is 15%? Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.
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 $549,000. 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 $1.60 per trap and believes that the traps can be sold for $6 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 10%. Year: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps) 0 0.6 0.8 1.0 1.0 0.5 0.3 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? (Do not round your intermediate…
Management of Crane Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $209,550 and will generate cash flows of $83,750 over each of the next six years. If the cost of capital is 11 percent, what is the MIRR on this project?
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straight-line over 6 years but, in fact, it can be sold after 6 years for $500,000. 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 $1.50 per trap and believes that the traps can be sold for $4 each. Sales forecasts are given in the following table. The project will come to an end in 5 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: Sales (millions of traps) 0 1 0.5 Increase in NPV 0.0651 million ✔ Answer is complete and correct. 2 0.6 3 1.0 4 1.0 5 0.6 6 0.2 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? Note:…
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straight-line over 6 years but, in fact, it can be sold after 6 years for $500,000. 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 $1.50 per trap and believes that the traps can be sold for $4 each. Sales forecasts are given in the following table. The project will come to an end in 5 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: Sales (millions of traps) Increase in NPV 0 0 million 1 0.5 2 0.6 3 1.0 4 1.0 5 0.6 6 0.2 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? Note: Do not round your intermediate…
Cheese & Cake Factory is looking at a project with the following forecasted sales: first-yearsales quantity of 35,000 with an annual growth rate of 5% over the next 5 years. The sales priceper unit is $40 and will grow at 3% per year. The production costs are expected to be 50% ofthe current year's sales price. The manufacturing equipment to aid this project will have a totalcost (including installation) of $1,000,000. It will be depreciated using MACRS and has aseven-year MACRS life classification. Fixed costs are $300,000 per year.The change in net operating working capital is $10,000 and will be recovered at the end of year5. Cheese & Cake Factory has a tax rate of 40%. At the end of year 5, the manufacturingequipment can be sold for $150,000 and the cost of capital for this project is 10%. What are the operating cash flow for years one and two?
An initial $400,000 investment in new production equipment will yield annual positive cash flows of $150,000 in year 1. Annual cash flows will decrease by $25,000 each year thereafter. The new equipment has a useful life of 7 years. MARR is 10% per year. Determine the DPBP of this project.
Jacob Inc. is considering a capital expansion project. The initial investment of undertaking this project is $188,500. This expansion project will last for five years. The net operating cash flows from the expansion project at the end of year 1, 2, 3, 4 and 5 are estimated to be $28,500, $38,780, $58,960, $77,680 and $95,380 respectively. Jacob has a weighted average cost of capital of 18%. What is the modified internal rate of return if Jacob undertakes this project. Assuming that the positive cash inflow from undertaking this project will be reinvested at the weighted average cost of capital.
help
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.4 million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years for $682,000. 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 $1.30 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 8%. Year: Sales (millions of traps) 0 0 Increase in NPV 1 0.5 million 2 0.7 3 0.8 4 0.8 5 0.7 6 0.5 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? Note: Do not round your intermediate…
You are responsible to manage an IS project with a 4-year horizon. The annal cost of the project is estimated at $40,000 per year, and a one-time costs of $120,000. The annual monetary benefit of the project is estimated at $96,000 per year with a discount rate of 6 percent. a. Calculate the overall return on investment (ROI) of the project. b. Perform a break-even analysis (BEA). At what year does break-even occur?
Tesla is considering an investment into a project which it intends to operate for 6 years. The project requires an initial outlay of $7 million. The project will generate cash sales of $3.5 million in the first year. Sales will grow by $1.5 million each year in the following two years. After the third year, sales will grow by 8%. Cash operating costs, excluding depreciation, will be 22% of sales. Depreciation expenses will be 11% of sales. There are no cash flows associated with the salvage value or the net working capital. Tesla’s tax rate is 35%. What is the IRR of this project?