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machine is $122,000. In addition, delivery and installation costs will total $5,500. The machine has the capacity to produce 12,000 dozen caps per year. Sales are forecast to increase gradually, and production volumes for each of the five years of the machine's life are expected to be as follows: Use Table 6-4. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.) 2019 3,600 dozen 5,600 dozen 8, 500 dozen 11,300 dozen 12,000 dozen 2020 2021 2022 2023 The caps have a contribution margin of $10.00 per dozen. Fixed costs associated with the additional production (other than depreciation expense) will be negligible. Salvage value and the investment in working capital should be ignored. TopCap Co's cost of capital for this capacity expansion has been set at 10%. Required: The caps have a contribution margin of $5.00 per dozen. Fixed costs associated with the additional production (other than depreciation expense) will be negligible. Salvage value and the investment in working capital should be ignored. TopCap Co's cost of capital for this capacity expansion has been set at 16%. Required: a. Calculate the net present value of the proposed investment in the new sewing machine.

machine is $122,000. In addition, delivery and installation costs will total $5,500. The machine has the capacity to produce 12,000 dozen caps per year. Sales are forecast to increase gradually, and production volumes for each of the five years of the machine's life are expected to be as follows: Use Table 6-4. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.) 2019 3,600 dozen 5,600 dozen 8, 500 dozen 11,300 dozen 12,000 dozen 2020 2021 2022 2023 The caps have a contribution margin of $10.00 per dozen. Fixed costs associated with the additional production (other than depreciation expense) will be negligible. Salvage value and the investment in working capital should be ignored. TopCap Co's cost of capital for this capacity expansion has been set at 10%. Required: The caps have a contribution margin of $5.00 per dozen. Fixed costs associated with the additional production (other than depreciation expense) will be negligible. Salvage value and the investment in working capital should be ignored. TopCap Co's cost of capital for this capacity expansion has been set at 16%. Required: a. Calculate the net present value of the proposed investment in the new sewing machine.

FINANCIAL ACCOUNTING
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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### Evaluation of Sewing Machine Purchase for TopCap Co. **Context:** TopCap Co. is evaluating the purchase of a new sewing machine designed to manufacture sport caps. The initial cost of the machine is $122,000. Additionally, delivery and installation costs add up to $5,500. This machine can produce up to 12,000 dozen caps per year. The forecasted sales volumes and production for the machine’s five-year lifespan are detailed below: **Projected Production Volumes (in dozens):** | Year | Production Volume | |------|---------------------| | 2019 | 3,600 dozen | | 2020 | 5,600 dozen | | 2021 | 8,500 dozen | | 2022 | 11,300 dozen | | 2023 | 12,000 dozen | #### Additional Information: - Each dozen caps contributes a margin of $10.00. - Fixed production costs, aside from depreciation, are negligible. - Salvage value and investment in working capital are to be disregarded. - The cost of capital for this expansion is 10%. **Required Calculations:** 1. Calculate the net present value (NPV) of the proposed investment in the new sewing machine. ### Further Analysis: To closely examine another scenario: 1. **Scenario: Revision of Contribution Margin & Cost of Capital** - Each dozen caps contributes a margin of $5.00. - The cost of capital for this expansion is reset to 16%. **Required Calculations:** 1. Calculate the net present value (NPV) of the proposed investment, factoring in the revised parameters. This section provides a structured approach to understanding how businesses evaluate capital investments based on projected cash flows and company-specific financial metrics. Accurate prediction and assessment of production volumes, contribution margins, and cost of capital are critical for informed decision-making.
Transcribed Image Text:### Evaluation of Sewing Machine Purchase for TopCap Co. **Context:** TopCap Co. is evaluating the purchase of a new sewing machine designed to manufacture sport caps. The initial cost of the machine is $122,000. Additionally, delivery and installation costs add up to $5,500. This machine can produce up to 12,000 dozen caps per year. The forecasted sales volumes and production for the machine’s five-year lifespan are detailed below: **Projected Production Volumes (in dozens):** | Year | Production Volume | |------|---------------------| | 2019 | 3,600 dozen | | 2020 | 5,600 dozen | | 2021 | 8,500 dozen | | 2022 | 11,300 dozen | | 2023 | 12,000 dozen | #### Additional Information: - Each dozen caps contributes a margin of $10.00. - Fixed production costs, aside from depreciation, are negligible. - Salvage value and investment in working capital are to be disregarded. - The cost of capital for this expansion is 10%. **Required Calculations:** 1. Calculate the net present value (NPV) of the proposed investment in the new sewing machine. ### Further Analysis: To closely examine another scenario: 1. **Scenario: Revision of Contribution Margin & Cost of Capital** - Each dozen caps contributes a margin of $5.00. - The cost of capital for this expansion is reset to 16%. **Required Calculations:** 1. Calculate the net present value (NPV) of the proposed investment, factoring in the revised parameters. This section provides a structured approach to understanding how businesses evaluate capital investments based on projected cash flows and company-specific financial metrics. Accurate prediction and assessment of production volumes, contribution margins, and cost of capital are critical for informed decision-making.
### Table 6.4: Factors for Calculating the Present Value of $1 This table is crucial for understanding the present value of $1 over a specific number of periods at various discount rates. The table can be utilized in financial calculations, particularly in determining the present value of future cash flows. #### Explanation of the Table - **Columns:** - The table is divided into columns representing different **Discount Rates**: 2%, 4%, 6%, 8%, 10%, 12%, 14%, 16%, 18%, and 20%. - **Rows:** - The rows correspond to the **Number of Periods** (ranging from 1 to 50 periods). #### How to Use the Table To find the present value factor: 1. Decide on the discount rate. 2. Determine the number of periods. 3. Find the intersection of the selected discount rate column and the number of periods row. ### Detailed Breakdown - **Period 1:** - Discount rates and their corresponding present value factors: - 2% -> 0.980 - 4% -> 0.9615 - 6% -> 0.9434 - 8% -> 0.9259 - 10% -> 0.9091 - 12% -> 0.8929 - 14% -> 0.8772 - 16% -> 0.8621 - 18% -> 0.8475 - 20% -> 0.8333 - **Period 2 through Period 50:** - The table continues similarly for each period, showing how the present value factor decreases as the discount rate or number of periods increases. #### Graphical Explanation (if any diagrams were included): If there were diagrams accompanying this table (such as line graphs), they would typically illustrate how the present value factor decreases as either the discount rate or the number of periods increases. For example, a line graph might show multiple lines, each representing a different discount rate. The x-axis would represent the number of periods, and the y-axis would represent the present value factor, showing a downward slope for each line (demonstrating the declining present value factor as the period increases). This table is an essential tool for financial analysts, accountants, and students to understand the concept
Transcribed Image Text:### Table 6.4: Factors for Calculating the Present Value of $1 This table is crucial for understanding the present value of $1 over a specific number of periods at various discount rates. The table can be utilized in financial calculations, particularly in determining the present value of future cash flows. #### Explanation of the Table - **Columns:** - The table is divided into columns representing different **Discount Rates**: 2%, 4%, 6%, 8%, 10%, 12%, 14%, 16%, 18%, and 20%. - **Rows:** - The rows correspond to the **Number of Periods** (ranging from 1 to 50 periods). #### How to Use the Table To find the present value factor: 1. Decide on the discount rate. 2. Determine the number of periods. 3. Find the intersection of the selected discount rate column and the number of periods row. ### Detailed Breakdown - **Period 1:** - Discount rates and their corresponding present value factors: - 2% -> 0.980 - 4% -> 0.9615 - 6% -> 0.9434 - 8% -> 0.9259 - 10% -> 0.9091 - 12% -> 0.8929 - 14% -> 0.8772 - 16% -> 0.8621 - 18% -> 0.8475 - 20% -> 0.8333 - **Period 2 through Period 50:** - The table continues similarly for each period, showing how the present value factor decreases as the discount rate or number of periods increases. #### Graphical Explanation (if any diagrams were included): If there were diagrams accompanying this table (such as line graphs), they would typically illustrate how the present value factor decreases as either the discount rate or the number of periods increases. For example, a line graph might show multiple lines, each representing a different discount rate. The x-axis would represent the number of periods, and the y-axis would represent the present value factor, showing a downward slope for each line (demonstrating the declining present value factor as the period increases). This table is an essential tool for financial analysts, accountants, and students to understand the concept
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