QUESTION 1 1. (14 MARKS) The Majestic Mulch and Compost Company (MMCC) is investigating the feasibility of a new line of power mulching tools aimed at the growing number of home composters. Based on exploratory conversations with buyers for large garden shops, MMCC projects unit sales as follows: UNIT SALES YEAR 1 2 3 4 5 6 3,000 5,000 6,000 6,500 6,000 5,000 4,000 3,000 7 8 The new power mulcher will sell for $120 per unit to start. When the competition catches up after three years, however, MMCC anticipates that the price will drop to $110.The power mulcher project will require about 20% of the first year sales revenue in net working capital at the start. The variable cost per unit is $60, and total fixed costs are $25,000 per year. It will cost about $800,000 in total to buy the equipment necessary to begin production. This investment is primarily in industrial equipment, which qualifies as seven-year MACRS property. The equipment will be worth about 20 percent of its cost in eight years. The relevant tax rate is 34 percent, and the required return is 15 percent. Based on this information, should MMCC proceed? USING SPREADSHEET SOFTWARE SUCH AS MS EXCEL OR GOOGLE SHEET, please prepare the followings SIMILAR TO THE FORMAT LAID OUT IN THE TEXTBOOK OR THE LECTURE NOTES OR YOU CAN DOWNLOAD THIS TEMPLATE TO COMPLETE THE ASSIGNMENT. A. The initial capital outlay for the project. B. The income statement for the project. C. The incremental annual cash flow of the project. D. The terminal cash flow of the project, and finally, E. The NPV analysis and decide whether the company should invest in this project with justifications.
QUESTION 1 1. (14 MARKS) The Majestic Mulch and Compost Company (MMCC) is investigating the feasibility of a new line of power mulching tools aimed at the growing number of home composters. Based on exploratory conversations with buyers for large garden shops, MMCC projects unit sales as follows: UNIT SALES YEAR 1 2 3 4 5 6 3,000 5,000 6,000 6,500 6,000 5,000 4,000 3,000 7 8 The new power mulcher will sell for $120 per unit to start. When the competition catches up after three years, however, MMCC anticipates that the price will drop to $110.The power mulcher project will require about 20% of the first year sales revenue in net working capital at the start. The variable cost per unit is $60, and total fixed costs are $25,000 per year. It will cost about $800,000 in total to buy the equipment necessary to begin production. This investment is primarily in industrial equipment, which qualifies as seven-year MACRS property. The equipment will be worth about 20 percent of its cost in eight years. The relevant tax rate is 34 percent, and the required return is 15 percent. Based on this information, should MMCC proceed? USING SPREADSHEET SOFTWARE SUCH AS MS EXCEL OR GOOGLE SHEET, please prepare the followings SIMILAR TO THE FORMAT LAID OUT IN THE TEXTBOOK OR THE LECTURE NOTES OR YOU CAN DOWNLOAD THIS TEMPLATE TO COMPLETE THE ASSIGNMENT. A. The initial capital outlay for the project. B. The income statement for the project. C. The incremental annual cash flow of the project. D. The terminal cash flow of the project, and finally, E. The NPV analysis and decide whether the company should invest in this project with justifications.
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
Question
Transcribed Image Text:QUESTION 1
1.
(14 MARKS)
The Majestic Mulch and Compost Company (MMCC) is investigating the
feasibility of a new line of power mulching tools aimed at the growing
number of home composters. Based on exploratory conversations with
buyers for large garden shops, MMCC projects unit sales as follows:
UNIT SALES
YEAR
1
2
3
4
5
6
3,000
5,000
6,000
6,500
6,000
5,000
4,000
3,000
7
8
The new power mulcher will sell for $120 per unit to start. When the
competition catches up after three years, however, MMCC anticipates that
the price will drop to $110.The power mulcher project will require about
20% of the first year sales revenue in net working capital at the start. The
variable cost per unit is $60, and total fixed costs are $25,000 per year. It
will cost about $800,000 in total to buy the equipment necessary to begin
production. This investment is primarily in industrial equipment, which
qualifies as seven-year MACRS property. The equipment will be worth
about 20 percent of its cost in eight years. The relevant tax rate is 34 percent,
and the required return is 15 percent. Based on this information, should
MMCC proceed? USING SPREADSHEET SOFTWARE SUCH AS MS
EXCEL OR GOOGLE SHEET, please prepare the followings SIMILAR
TO THE FORMAT LAID OUT IN THE TEXTBOOK OR THE
LECTURE NOTES OR YOU CAN DOWNLOAD THIS TEMPLATE
TO COMPLETE THE ASSIGNMENT.
A. The initial capital outlay for the project.
B. The income statement for the project.
C. The incremental annual cash flow of the project.
D. The terminal cash flow of the project, and finally,
E. The NPV analysis and decide whether the company should invest in this
project with justifications.
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