Ralph’s Bow Works (RBW) is planning to add a new line of bow ties that will require the acquisition of a new knitting and tying machine. The machine will cost $1.1 million. It is classified as a 7-year MACRS asset and will be depreciated as such. Interest costs associated with financing the equipment purchase are estimated to be $40,000 per year. The expected salvage value of the machine at the end of 13 years is $60,000. The decision to add the new line of bow ties will require additional net working capital of $55,000 immediately, $25,000 at the end of year 1, and $5,000 at the end of year 2. RBW expects to sell $390,000 worth of the bow ties during each of the 13 years of product life. RBW expects the sales of its other ties to decline by $18,000 (in year 1) as a result of adding this new line of ties. The lost sales level will remain constant at $18,000 over the 13-year life of the proposed project. The cost of producing and selling the ties is estimated to be $70,000 per year. RBW will realize savings of $3,000 each year because of lost sales on its other tie lines. The marginal tax rate is 40 percent. Use Table 9A-3 to answer the questions below. Round your answers to the nearest dollar. Compute the net investment (year 0). $ Compute the net cash flows for years 1 and 13 for this project. NCF1: $ NCF13: $
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
Ralph’s Bow Works (RBW) is planning to add a new line of bow ties that will require the acquisition of a new knitting and tying machine. The machine will cost $1.1 million. It is classified as a 7-year MACRS asset and will be
Compute the net investment (year 0).
$
Compute the net cash flows for years 1 and 13 for this project.
NCF1: $
NCF13: $
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