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 $6,050, including a set of eight chairs. The company feels that sales will be 2,000, 2,150, 2,700, 2,550, and 2,300 sets per year for the next five years, respectively. Variable costs will amount to 42 percent of sales and fixed costs are $1,820,000 per year. The new tables 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 250 tables per year of the oak tables the company produces. These tables sell for $3,600 and have variable costs of 37 percent of sales. The inventory for this oak table is also 7 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 $16,000,000. 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 $16,000,000 in two years to accommodate the increased sales of its current products. In five years, the new equipment will have a market value of $3,300,000 if purchased today, and $6,600,000 if purchased in two years. The equipment is depreciated on a seven-year MACRS schedule. The company has a tax rate of 22 percent and the required return for the project is 9 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
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 $6,050, including a set of eight chairs. The company feels that sales will be 2,000, 2,150, 2,700, 2,550, and 2,300 sets per year for the next five years, respectively. Variable costs will amount to 42 percent of sales and fixed costs are $1,820,000 per year. The new tables 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 250 tables per year of the oak tables the company produces. These tables sell for $3,600 and have variable costs of 37 percent of sales. The inventory for this oak table is also 7 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 $16,000,000. 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 $16,000,000 in two years to accommodate the increased sales of its current products. In five years, the new equipment will have a market value of $3,300,000 if purchased today, and $6,600,000 if purchased in two years. The equipment is depreciated on a seven-year MACRS schedule. The company has a tax rate of 22 percent and the required return for the project is 9 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
Related questions
Concept explainers
Question
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 $6,050, including a
set of eight chairs. The company feels that sales will be 2,000, 2,150, 2,700, 2,550, and
2,300 sets per year for the next five years, respectively. Variable costs will amount to 42
percent of sales and fixed costs are $1,820,000 per year. The new tables 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 250 tables per
year of the oak tables the company produces. These tables sell for $3,600 and have
variable costs of 37 percent of sales. The inventory for this oak table is also 7 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
$16,000,000. 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 $16,000,000 in two years to accommodate the increased sales of its
current products. In five years, the new equipment will have a market value of
$3,300,000 if purchased today, and $6,600,000 if purchased in two years. The
equipment is depreciated on a seven-year MACRS schedule. The company has a tax
rate of 22 percent and the required return for the project is 9 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
www
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Knowledge Booster
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.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
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…
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