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 $6,200, including a set of eight chairs. The company feels that sales will be 1,900, 2,050, 2,600, 2,450, and 2,200 sets per year for the next five years, respectively. Variable costs will amount to 40 percent of sales and fixed costs are $1,810,000 per year. The new tables will require inventory amounting to 6 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 200 tables per year of the oak tables the company produces. These tables sell for $3,500 and have variable costs of 35 percent of sales. The inventory for this oak table is also 6 percent of sales. The sales of the oak table will continue indefinitely. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $19,000,000. 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 $19,000,000 in two years to accommodate the increased sales of its current products. In five years, the new equipment will have a market value of $3,200,000 if purchased today, and $7,900,000 if purchased in two years. The equipment is depreciated on a seven-year MACRS schedule. The company has a tax rate of 21 percent and the required return for the project is 8 percent. MACRS schedule Calculate the NPV of new project. (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) NPV

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
icon
Related questions
Question
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 $6,200, including a
set of eight chairs. The company feels that sales will be 1,900, 2,050, 2,600, 2,450, and
2,200 sets per year for the next five years, respectively. Variable costs will amount to 40
percent of sales and fixed costs are $1,810,000 per year. The new tables will require
inventory amounting to 6 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 200 tables per
year of the oak tables the company produces. These tables sell for $3,500 and have
variable costs of 35 percent of sales. The inventory for this oak table is also 6 percent of
sales. The sales of the oak table will continue indefinitely. J. Smythe currently has excess
production capacity. If the company buys the necessary equipment today, it will cost
$19,000,000. 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 $19,000,000 in two years to accommodate the increased sales of its
current products. In five years, the new equipment will have a market value of
$3,200,000 if purchased today, and $7,900,000 if purchased in two years. The
equipment is depreciated on a seven-year MACRS schedule. The company has a tax
rate of 21 percent and the required return for the project is 8 percent. MACRS schedule
Calculate the NPV of new project. (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)
NPV
Transcribed Image Text: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 $6,200, including a set of eight chairs. The company feels that sales will be 1,900, 2,050, 2,600, 2,450, and 2,200 sets per year for the next five years, respectively. Variable costs will amount to 40 percent of sales and fixed costs are $1,810,000 per year. The new tables will require inventory amounting to 6 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 200 tables per year of the oak tables the company produces. These tables sell for $3,500 and have variable costs of 35 percent of sales. The inventory for this oak table is also 6 percent of sales. The sales of the oak table will continue indefinitely. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $19,000,000. 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 $19,000,000 in two years to accommodate the increased sales of its current products. In five years, the new equipment will have a market value of $3,200,000 if purchased today, and $7,900,000 if purchased in two years. The equipment is depreciated on a seven-year MACRS schedule. The company has a tax rate of 21 percent and the required return for the project is 8 percent. MACRS schedule Calculate the NPV of new project. (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) NPV
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Factors Affecting Housing Decision
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
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education