to introduce a new mahogany dining room table set. The set will sell for $7,400, including a set of eight chairs. The company feels that sales will be 1,850, 2,000, 2,550, 2,400, and 2,150 sets per year for the next five years, respectively. Variable costs will amount to 47 percent of sales and fixed costs are $1,940,000 per year. The new tables will require inventory amounting to 9 percent of sales, produced and stockpiled in the year prior to sales. It is believed that the addition of the new table will cause a loss of 350 tables per year of the oak tables the company produces. These tables sell for $4,700 and have variable costs of 42 percent of sales. The inventory for this oak table is also 9 percent of sales. The sales of the oak table will continue indefinitely. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $15,000,000. However, the excess production capacity means the company can produce the new table without buying the new equipment. The company controller has said that the current excess capacity will end in two years with current production. This means that if the company uses the current excess capacity for the new table it will be forced to spend the $15.000.000 in two years to accommodate the
to introduce a new mahogany dining room table set. The set will sell for $7,400, including a set of eight chairs. The company feels that sales will be 1,850, 2,000, 2,550, 2,400, and 2,150 sets per year for the next five years, respectively. Variable costs will amount to 47 percent of sales and fixed costs are $1,940,000 per year. The new tables will require inventory amounting to 9 percent of sales, produced and stockpiled in the year prior to sales. It is believed that the addition of the new table will cause a loss of 350 tables per year of the oak tables the company produces. These tables sell for $4,700 and have variable costs of 42 percent of sales. The inventory for this oak table is also 9 percent of sales. The sales of the oak table will continue indefinitely. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $15,000,000. However, the excess production capacity means the company can produce the new table without buying the new equipment. The company controller has said that the current excess capacity will end in two years with current production. This means that if the company uses the current excess capacity for the new table it will be forced to spend the $15.000.000 in two years to accommodate the
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
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Give me correct answer with explanation.j
Transcribed Image Text:J. Smythe, Incorporated, manufactures fine furniture. The company is deciding whether
to introduce a new mahogany dining room table set. The set will sell for $7,400,
including a set of eight chairs. The company feels that sales will be 1,850, 2,000, 2,550,
2,400, and 2,150 sets per year for the next five years, respectively. Variable costs will
amount to 47 percent of sales and fixed costs are $1,940,000 per year. The new tables
will require inventory amounting to 9 percent of sales, produced and stockpiled in the
year prior to sales. It is believed that the addition of the new table will cause a loss of
350 tables per year of the oak tables the company produces. These tables sell for
$4,700 and have variable costs of 42 percent of sales. The inventory for this oak table is
also 9 percent of sales. The sales of the oak table will continue indefinitely. J. Smythe
currently has excess production capacity. If the company buys the necessary equipment
today, it will cost $15,000,000. However, the excess production capacity means the
company can produce the new table without buying the new equipment. The company
controller has said that the current excess capacity will end in two years with current
production. This means that if the company uses the current excess capacity for the new
table, it will be forced to spend the $15,000,000 in two years to accommodate the
increased sales of its current products. In five years, the new equipment will have a
market value of $3,300,000 if purchased today, and $5,900,000 if purchased in two
years. The equipment is depreciated on a seven-year MACRS schedule. The company
has a tax rate of 23 percent and the required return for the project is 11 percent. (MACRS
schedule)
Calculate the NPV of new project. (Do not round intermediate calculations and enter
your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,
1,234,567.89)
NPV
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