The Platinum Company is a national mattress manufacturer. Its Marion plant will become idle on December 31, 2020. Nina Simon, the corporate controller, has been asked to look at three options regarding the plant: (Click the icon to view the options.) Platinum Company treats all cash flows as if they occur at the end of the year and uses an after-tax Requirements Calculate net present value of each of the options and determine which option Platinum should select using the NPV criterion. 2. What nonfinancial factors should Platinum consider before making its choice? 1. Dec 31, 2021 Dec 31, 2022 Dec 31, 2023 Print Done X X = = More info Option 1: The plant can be leased to the Coil Corporation, one of Platinum's suppliers, for 3 years. Under the lease terms, Coil would pay Platinum $220,000 rent per year (payable at year-end) and would grant Platinum a $64,000 annual discount from the normal price of coils purchased by Platinum. (Assume that the discount is received at year-end for each of the 3 years.) Coil would bear all of the plant's ownership costs. Platinum expects to sell this plant for $320,000 at the end of the 3-year lease. Option 2: The plant could be used for 3 years to make mattress covers as an accessory to be sold with a mattress. Fixed overhead costs (a cash outflow) before any equipment upgrades are estimated to be $18,000 annually for the 3-year period (assume the fixed costs occur at year-end). The covers are expected to sell for $25 each and variable cost per unit is expected to be $10. The following production and sales of the mattress covers are expected: 2021, 22,000 units; 2022, 18,000 units; 2023, 20,000 units. In order to manufacture the mattress covers, some of the plant equipment would need to be upgraded at an immediate cost of $120,000. The equipment would be depreciated using the straight-line depreciation method and zero terminal disposal value over the 3 years it would be in use. Because of the equipment upgrades, Platinum could sell the plant for $360,000 at the end of 3 years. No change in working capital would be required. Option 3: The plant, which has been fully depreciated for tax purposes, can be sold immediately for $800,000.

The Platinum Company is a national mattress manufacturer. Its Marion plant will become idle on December 31, 2020. Nina Simon, the corporate controller, has been asked to look at three options regarding the plant: (Click the icon to view the options.) Platinum Company treats all cash flows as if they occur at the end of the year and uses an after-tax Requirements Calculate net present value of each of the options and determine which option Platinum should select using the NPV criterion. 2. What nonfinancial factors should Platinum consider before making its choice? 1. Dec 31, 2021 Dec 31, 2022 Dec 31, 2023 Print Done X X = = More info Option 1: The plant can be leased to the Coil Corporation, one of Platinum's suppliers, for 3 years. Under the lease terms, Coil would pay Platinum $220,000 rent per year (payable at year-end) and would grant Platinum a $64,000 annual discount from the normal price of coils purchased by Platinum. (Assume that the discount is received at year-end for each of the 3 years.) Coil would bear all of the plant's ownership costs. Platinum expects to sell this plant for $320,000 at the end of the 3-year lease. Option 2: The plant could be used for 3 years to make mattress covers as an accessory to be sold with a mattress. Fixed overhead costs (a cash outflow) before any equipment upgrades are estimated to be $18,000 annually for the 3-year period (assume the fixed costs occur at year-end). The covers are expected to sell for $25 each and variable cost per unit is expected to be $10. The following production and sales of the mattress covers are expected: 2021, 22,000 units; 2022, 18,000 units; 2023, 20,000 units. In order to manufacture the mattress covers, some of the plant equipment would need to be upgraded at an immediate cost of $120,000. The equipment would be depreciated using the straight-line depreciation method and zero terminal disposal value over the 3 years it would be in use. Because of the equipment upgrades, Platinum could sell the plant for $360,000 at the end of 3 years. No change in working capital would be required. Option 3: The plant, which has been fully depreciated for tax purposes, can be sold immediately for $800,000.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter19: Lease Financing

Section: Chapter Questions

Problem 7P

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