The Wooden World Inc. is planning to start a 3-year project. It will be designing and selling wooden nutcrackers as home decorations, and selling them both in local stores and online. The Wooden World Inc.'s required return on this new project is 13 percent. This should correctly compensate the company for the uncertainty and therefore the risk of the cash flows that it's facing with this new project. The annual taxable income is currently taxed at 21 percent rate, and the company believes it will stay in this tax rate if the project is launched. If the project gets launched then $5.778 million would need to be invested right away. This is a lot of money, but the high-quality hand- made nutcrackers will be sold for a high price a piece, and there'll be plenty of customers willing the pay the price! This amount of money will be used to buy special wood tools and equipment which have an economic life of 3 years. These tools and equipment will be losing the same value over their economic life. When the project ends, those will get sold for an estimated $449,400. In addition, the Wooden World Inc. would need to immediately invest $642,000 as a "just in case" cash reserve to cover any unexpected expenses to repair the equipment that may be arising from time to time. Finally, the Wooden World Inc. believes it'll be able to earn $5,136,000 in annual sales revenues and face the annual costs of $2,054,400 to pay for everything related to the production of the wooden nutcrackers. What is the project's total cash flow in "Year O"? What is the project's total cash flow in "Year 1"? What is the project's total cash flow in "Year 2"? What is the project's total cash flow in "Year 3"? Finally, based on all of the above calculations, what is the project's Net Present Value?
The Wooden World Inc. is planning to start a 3-year project. It will be designing and selling wooden nutcrackers as home decorations, and selling them both in local stores and online. The Wooden World Inc.'s required return on this new project is 13 percent. This should correctly compensate the company for the uncertainty and therefore the risk of the cash flows that it's facing with this new project. The annual taxable income is currently taxed at 21 percent rate, and the company believes it will stay in this tax rate if the project is launched. If the project gets launched then $5.778 million would need to be invested right away. This is a lot of money, but the high-quality hand- made nutcrackers will be sold for a high price a piece, and there'll be plenty of customers willing the pay the price! This amount of money will be used to buy special wood tools and equipment which have an economic life of 3 years. These tools and equipment will be losing the same value over their economic life. When the project ends, those will get sold for an estimated $449,400. In addition, the Wooden World Inc. would need to immediately invest $642,000 as a "just in case" cash reserve to cover any unexpected expenses to repair the equipment that may be arising from time to time. Finally, the Wooden World Inc. believes it'll be able to earn $5,136,000 in annual sales revenues and face the annual costs of $2,054,400 to pay for everything related to the production of the wooden nutcrackers. What is the project's total cash flow in "Year O"? What is the project's total cash flow in "Year 1"? What is the project's total cash flow in "Year 2"? What is the project's total cash flow in "Year 3"? Finally, based on all of the above calculations, what is the project's Net Present Value?
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 1PA: Your company is planning to purchase a new log splitter for is lawn and garden business. The new...
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Transcribed Image Text:The Wooden World Inc. is planning to
start a 3-year project. It will be
designing and selling wooden
nutcrackers as home decorations, and
selling them both in local stores and
online. The Wooden World Inc.'s
required return on this new project is
13 percent. This should correctly
compensate the company for the
uncertainty and therefore the risk of
the cash flows that it's facing with this
new project. The annual taxable
income is currently taxed at 21 percent
rate, and the company believes it will
stay in this tax rate if the project is
launched. If the project gets launched
then $5.778 million would need to be
invested right away. This is a lot of
money, but the high-quality hand-
made nutcrackers will be sold for a
high price a piece, and there'll be
plenty of customers willing the pay the
price! This amount of money will be
used to buy special wood tools and
equipment which have an economic
life of 3 years. These tools and
equipment will be losing the same
value over their economic life. When
the project ends, those will get sold for
an estimated $449,400. In addition,
the Wooden World Inc. would need to
immediately invest $642,000 as a "just
in case" cash reserve to cover any
unexpected expenses to repair the
equipment that may be arising from
time to time. Finally, the Wooden
World Inc. believes it'll be able to earn
$5,136,000 in annual sales revenues
and face the annual costs of
$2,054,400 to pay for everything
related to the production of the
wooden nutcrackers. What is the
project's total cash flow in "Year O"?
What is the project's total cash flow in
"Year 1"? What is the project's total
cash flow in "Year 2"? What is the
project's total cash flow in "Year 3"?
Finally, based on all of the above
calculations, what is the project's Net
Present Value?
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