ou have founded a company to sell thin client computers to the food processing ndustry for Internet e-commerce transaction processing. Before investing in your ew company, a venture capitalist has asked for a five year pro-forma income tatement showing unit sales, revenue, total variable cost, marketing expense, ixed cost, and profit before tax. You expect to sell 1,600 units of the thin client computers in the first year for a price of $1,800 each. Swept along by Internet growth, you expect to double unit sales each year for the next five years. However, competition will force a 15% decline in price each year. Fortunately, echnical progress allows initial variable manufacturing costs of $1,000 for each unit to decline by 6% per year. Fixed costs are estimated to be $1,000,000 per ear. Marketing expense is projected to be 14% of annual revenue. When it pecomes profitable to do so, you will lease an automated assembly machine that educes variable manufacturing costs by 20% but doubles annual fixed cost; the ew variable manufacturing cost will also decline by 6% per year. Net Present

ou have founded a company to sell thin client computers to the food processing ndustry for Internet e-commerce transaction processing. Before investing in your ew company, a venture capitalist has asked for a five year pro-forma income tatement showing unit sales, revenue, total variable cost, marketing expense, ixed cost, and profit before tax. You expect to sell 1,600 units of the thin client computers in the first year for a price of $1,800 each. Swept along by Internet growth, you expect to double unit sales each year for the next five years. However, competition will force a 15% decline in price each year. Fortunately, echnical progress allows initial variable manufacturing costs of $1,000 for each unit to decline by 6% per year. Fixed costs are estimated to be $1,000,000 per ear. Marketing expense is projected to be 14% of annual revenue. When it pecomes profitable to do so, you will lease an automated assembly machine that educes variable manufacturing costs by 20% but doubles annual fixed cost; the ew variable manufacturing cost will also decline by 6% per year. Net Present

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 9E: Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required:...

See similar textbooks

Similar questions

An investor is looking at building a factory to make gizmos. He estimates that it would cost $150,000 to build this factory from scratch. He reckons that his returns from the sale of gizmos would be $20,000 at the end of year 1, 35,000 in year 2, 40,000 in year 3, 60,000 in year 4 and 75,000 in year 5. The bank currently offers an interest rate of 8% on loans. The investor does his calculations and goes to present his proposal to the bank manager. Would the bank manager approve the loan? Why? Calculate the investor's exact MEC? Make sure to show every step in the calculations to get full marks. Round off to whole numbers.
Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be 800,000 per year. The system costs 4,000,000 and will last eight years. Compute the NPV assuming a discount rate of 10 percent. Should the company buy the new system? 2. Sterling Wetzel has just invested 270,000 in a restaurant specializing in German food. He expects to receive 43,470 per year for the next eight years. His cost of capital is 5.5 percent. Compute the internal rate of return. Did Sterling make a good decision?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $180,000. She estimates that the return from owning her own shop will be $55,000 per year. She estimates that the shop will have a useful life of 6 years. Required: 2. Conceptual Connection: Assuming a required rate of return of 8%, calculate the NPV for Evee Cardenas' investment. Round to the nearest dollar. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV.$fill in the blank 3 Should she invest?Yes/no
What price should Brady charge for a room-night? What is the markup as a percentage of the full cost of a room-night?
Please try to solve it in 30 minute
Greater Findlay Development Consortium is preparing to open a new retail strip mall and have multiple businesses that would like lease space in it. Each business will pay a fixed amount of rent plus a percentage of the gross sales generated each year. The cash flows from each of the businesses has approximately the same amount of risk. The business names, annual expected cash flows, and initial capital outflow for each of the businesses that would like to lease space in the strip mall are provided below. Greater Findlay Development Consortium uses a 12% hurdle rate which is its cost of capital. All business will be evaluated based on 4-year term because the contract will expire in four years. Video Now Apple Garden Croger Mart Horizon Wireless Initial Capital Outlay ($200,000) ($298,000) ($248,000) ($272,000) Annual Net Cash Flows Year 1 65,000 100,000 80,000…
Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $280,000. She estimates that the return from owning her own shop will be $35,000 per year. She estimates that the shop will have a useful life of 6 years. Assuming a required rate of return of 8%, calculate the NPV for Evee Cardenas' investment. What if the estimated return was $135,000 per year? Calculate the new NPV for Evee Cardenas' investment.
The Hub is a business dedicated to providing rentable work spaces for local companies or self-employed individuals. As they begin to expand their business, they need to acquire a set of computers for an in-house computer lab. IBM offers the computers for a single payment of $55,000 due at the end of four years. Dell offers similar computers, but requires four annual payments of $13,000 due at the end of each year. The Hub could borrow the funds at 5%. Using discounted cash flows, determine which computers The Hub should purchase. Select one: a. IBM O b. Del
You run a business and are considering offeringa new service. If you offer the new service, youexpect it to generate $60,000 in profits each yearfor your business over the next two years. In orderto offer the new service, you will need to take outa loan for new equipment. Assume a 5 percentannual interest rate
second screenshot shows the options to fill in the blanks