Replacement Decision. Wisconsin Products Company manufactures several different One of the firm's principal products sells for $20 per unit. The sales manager of roducts has stated repeatedly that he could sell more units of this product if they were a an attempt to substantiate his claim the sales manager conducted a market research ar at a cost of $44,000 to determine potential demand for this product. The study indi isconsin Products could sell 18.000 units of this product annually for the next 5 vea
Replacement Decision. Wisconsin Products Company manufactures several different One of the firm's principal products sells for $20 per unit. The sales manager of roducts has stated repeatedly that he could sell more units of this product if they were a an attempt to substantiate his claim the sales manager conducted a market research ar at a cost of $44,000 to determine potential demand for this product. The study indi isconsin Products could sell 18.000 units of this product annually for the next 5 vea
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:NPV is negative.
8.16 Replacement Decision. Wisconsin Products Company manufactures several different products.
One of the firm's principal products sells for $20 per unit. The sales manager of Wisconsin
Products has stated repeatedly that he could sell more units of this product if they were available.
In an attempt to substantiate his claim the sales manager conducted a market research study last
year at a cost of $44,000 to determine potential demand for this product. The study indicated that
Wisconsin Products could sell 18,000 units of this product annually for the next 5 years.
![flows. Explain why your corected calculations differ from the original analysis prepared by the
flow analysis for this investment proposal. The controller has asked you to prepare corrected
calculations of (a) the required investment in the new equipment and (6) the recurring annual cash
236
The controller of Wisconsin Products Company plans to prepare a discounted cash
sales manager. (c) Calculate the net present value of the proposed investment in the new
CAPITAL BUL
zero in 5 years.
ment costs $300,000 and has an estimated useful life of 5 years, with no salvage value at the end
if purchased, would provide increased production efficiencies that would reduce the varis
production costs to $7 per unit.
Wisconsin Products Company uses straight-line depreciation on all its equipment for
tax purposes. The firm is subject to a 40 percent tax rate, and its after-tax cost of capital
15 percent.
The sales manager felt so strongly about the need for additional capacity that he attempted
to prepare an economic justification for the equipment although this was not one of bi
responsibilities. His analysis, presented below and on the next page, disappointed him because
it did not justify acquisition of the cquipment.
He computed the required investment as follows:
$300,000
Purchase price of new equipment
Disposal of existing equipment
Loss on disposal
Less tax benefit (40%)
Cost of market research study
S60,000
24,000
36,000
44,000
Total investment
$380,000
He computed the annual returns as follows:
Contribution margin from product
Using the new equipment
[18,000 x (S20 - $7)]
Using the existing equipment
[11,000 x (S20 - S9)]
Increase in contribution margin
Less depreciation
Increase in before-tax income
Income tax (40%)
$234,000
121,000
$113,000
60,000
$53,000
21.200
$31,800
Increase in income
Less 15% cost of capital on the
additional investment required
(0.15 x $380,000)
57,000
Net annual return on proposed
investment in new equipment
S(25,200)
equipment.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F880523ca-2b60-4772-abbf-6457637cd497%2F2b4fd0be-ffc4-4694-9d6a-e3d450333aa5%2Fgyec6ss_processed.jpeg&w=3840&q=75)
Transcribed Image Text:flows. Explain why your corected calculations differ from the original analysis prepared by the
flow analysis for this investment proposal. The controller has asked you to prepare corrected
calculations of (a) the required investment in the new equipment and (6) the recurring annual cash
236
The controller of Wisconsin Products Company plans to prepare a discounted cash
sales manager. (c) Calculate the net present value of the proposed investment in the new
CAPITAL BUL
zero in 5 years.
ment costs $300,000 and has an estimated useful life of 5 years, with no salvage value at the end
if purchased, would provide increased production efficiencies that would reduce the varis
production costs to $7 per unit.
Wisconsin Products Company uses straight-line depreciation on all its equipment for
tax purposes. The firm is subject to a 40 percent tax rate, and its after-tax cost of capital
15 percent.
The sales manager felt so strongly about the need for additional capacity that he attempted
to prepare an economic justification for the equipment although this was not one of bi
responsibilities. His analysis, presented below and on the next page, disappointed him because
it did not justify acquisition of the cquipment.
He computed the required investment as follows:
$300,000
Purchase price of new equipment
Disposal of existing equipment
Loss on disposal
Less tax benefit (40%)
Cost of market research study
S60,000
24,000
36,000
44,000
Total investment
$380,000
He computed the annual returns as follows:
Contribution margin from product
Using the new equipment
[18,000 x (S20 - $7)]
Using the existing equipment
[11,000 x (S20 - S9)]
Increase in contribution margin
Less depreciation
Increase in before-tax income
Income tax (40%)
$234,000
121,000
$113,000
60,000
$53,000
21.200
$31,800
Increase in income
Less 15% cost of capital on the
additional investment required
(0.15 x $380,000)
57,000
Net annual return on proposed
investment in new equipment
S(25,200)
equipment.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 1 images
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