Secure Homes is pondering an opportunity to produce and sell a new smart home monitoring system that can be managed remotely using a smartphone app. The company has gathered the following data on probable costs and market potential: a. New equipment would have to be acquired to produce the monitoring system. The equipment would cost $310,000 and be usable for 12 years. After 12 years, it would have a salvage value equal to 10% of the original cost. b. Production and sales of the monitoring system would require a working capital investment of $124,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere by the company after 12 years. c. An extensive marketing study projects sales in units over the next 12 years as follows: Sales in Year(s) Units 1 4,100 2 7,280 10,150 12,020 3 4-12 d. The monitoring systems would sell for $131 each; variable costs for production, administration, and sales would be $75 per unit. e. To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows: Amount of Year(s) Advertising $231,000 168,000 1-2 3 4-12 122,000 f. Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $353,000 per year. (Depreciation is based on cost less salvage value.) g. The company's required rate of return is 12%. (Ignore income taxes.)
Secure Homes is pondering an opportunity to produce and sell a new smart home monitoring system that can be managed remotely using a smartphone app. The company has gathered the following data on probable costs and market potential: a. New equipment would have to be acquired to produce the monitoring system. The equipment would cost $310,000 and be usable for 12 years. After 12 years, it would have a salvage value equal to 10% of the original cost. b. Production and sales of the monitoring system would require a working capital investment of $124,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere by the company after 12 years. c. An extensive marketing study projects sales in units over the next 12 years as follows: Sales in Year(s) Units 1 4,100 2 7,280 10,150 12,020 3 4-12 d. The monitoring systems would sell for $131 each; variable costs for production, administration, and sales would be $75 per unit. e. To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows: Amount of Year(s) Advertising $231,000 168,000 1-2 3 4-12 122,000 f. Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $353,000 per year. (Depreciation is based on cost less salvage value.) g. The company's required rate of return is 12%. (Ignore income taxes.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Please solve (3)
Transcribed Image Text:3. What is the project's internal rate of return? (Hint. Use Microsoft Excel to calculate the discount factor(s).) (Round
your answer to 1 decimal place.)
Internal rate of return
0.0 %
Transcribed Image Text:Secure Homes is pondering an opportunity to produce and sell a new smart home monitoring system that can be
managed remotely using a smartphone app. The company has gathered the following data on probable costs and
market potential:
a. New equipment would have to be acquired to produce the monitoring system. The equipment would cost
$310,000 and be usable for 12 years. After 12 years, it would have a salvage value equal to 10% of the original
cost.
b. Production and sales of the monitoring system would require a working capital investment of $124,000 to finance
accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use
elsewhere by the company after 12 years.
C. An extensive marketing study projects sales in units over the next 12 years as follows:
Sales in
Year(s)
Units
1
4,100
7,280
2
10,150
12,020
3
4-12
d. The monitoring systems would sell for $131 each; variable costs for production, administration, and sales would be
$75 per unit.
e. To gain entry into the market, the company would have to advertise heavily in the early years of sales. The
advertising program follows:
Amount of
Year (s) Advertising
$231,000
168,000
122,000
1-2
4-12
f. Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total
$353,000 per year. (Depreciation is based on cost less salvage value.)
g. The company's required rate of return is 12%.
(Ignore income taxes.)
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