Problem 7-25 Scenario AnalysisYou are the financial analyst for a tennis racket manufacturer. The company isconsidering using a graphitelike material in its tennis rackets. The company hasestimated the information in the following table about the market for a racket with thenew material. The company expects to sell the racket for 5 years. The equipmentrequired for the project will be depreciated on a straight-line basis and has no salvagevalue. The required return for projects of this type is 14 percent and the company has a22 percent tax rate.Market sizeMarket shareSelling priceVariable costs perunitFixed costs per yearInitial investmentPessimistic127,000PessimisticExpectedOptimistic18%$ 146$96$ 968,000$ 1,620,000Expected137,00022%$ 151$92$ 913,000$ 1,470,000Optimistic149,00024%$ 155$89$ 883,000$ 1,450,000Calculate the NPV for each case for this project. Assume a negative taxable incomegenerates a tax credit. (A negative amount should be indicated by a minus sign. Donot round intermediate calculations and round your answers to 2 decimal places, e.g.,32.16.)

Net present value refers to the method of capital budgeting used for evaluating the viability of the…

Answered: You are the financial analyst for a…

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

See similar textbooks

Similar questions

5 You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for 4 years. The equipment required for the project will be depreciated on a straight-line basis and has no salvage value. The required return for projects of this type is 12 percent and the company has a 24 percent tax rate. Market size Market share Selling price Variable costs per unit Fixed costs per year Initial investment Pessimistic Expected 131,000 141,000 Pessimistic Expected Optimistic $ $ Optimistic 20% 24% 141 $ 146 $ 94 $ 90 $ $966,000 $1,318,000 153,000 26% 150 87 $911,000 $881,000 $1,168,000 $1,148,000 Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit. (A negative amount should be indicated by a minus sign. Do not round…
Question 7 Elmdale Company has a machine that affixes labels to bottles. The machine has a book value of $80,000 and a remaining useful life of 3 years and no salvage value. A new, more efficient machine is available at a cost of $300,000 that will have a 3-year useful life with no salvage value. The new machine will lower annual variable production costs from $520,000 to $410,000. What is the effect on net income over the 3 years if Elmdale Company chooses to replace the equipment? Should Elmdale replace the equipment? lyjı H 4 pts 99+
8. Analysis of a replacement project Aa Aa At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Johnson Co. is considering replacing an existing piece of equipment. The project involves the following: The new equipment will have a cost of $1,800,000, and it will be depreciated on a straight-line basis over a period of six years (years 1-6). • The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year). The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000. Replacing the old machine will require an investment in net working capital (NWC) of $60,000 that will be…
Question 2:ABC Company has two projects:A: It is considering to purchase an equipment to be attached with the main manufacturing machine. Theequipment will cost $6,000 and will have annual cash inflow by $2,200. The life of the equipment is 6 years.After 6 years, it will have no salvage value. The management wants a 20% return on all investments.B: It is planning to reduce its labor costs by automating a critical task that is currently performed manually.The cost to purchase a new machine is $15,000. The installation of machine can reduce annual labor cost by$4,200. The life of the machine is 15 years. The salvage value of the machine after fifteen years will be zero.The required rate of return of Smart Manufacturing Company is 25%.a) Will you go ahead with this project A? Explain.b) Will you go ahead with this project B? Explain.c) What about if these two projects are two mutually exclusive ones?d) Will IRR and NPV always give you the same results?
Replacement project example: Suppose Mayco wants to replace an existing printer with a new high-speed copier. The existing printer was purchased 13 years ago at a cost of $16,000. The printer is being depreciated using straight line basis assuming a useful life of 18 years and no salvage value. If the existing printer is not replaced, it will have zero market value at the end of its useful life. The new high-speed copier can be purchased for $23,000 (including freight and installation). Over its 5-year life, it will reduce labor and raw materials usage sufficiently to cut annual operating costs from $18,000 to $9,000. This reduction in costs will cause before-tax profits to rise by an equal amount. It is estimated that the new copier can be sold for $2,400 at the end of five years; this is its estimated salvage value. The old printer's current market value is $4,576. If the new copier is acquired, the old printer will be sold to another company. The company's marginal…
Replacement project example: Suppose Mayco wants to replace an existing printer with a new high-speed copier. The existing printer was purchased 13 years ago at a cost of $16,000. The printer is being depreciated using straight line basis assuming a useful life of 18 years and no salvage value. If the existing printer is not replaced, it will have zero market value at the end of its useful life. The new high-speed copier can be purchased for $23,000 (including freight and installation). Over its 5-year life, it will reduce labor and raw materials usage sufficiently to cut annual operating costs from $18,000 to $9,000. This reduction in costs will cause before-tax profits to rise by an equal amount. It is estimated that the new copier can be sold for $2,400 at the end of five years; this is its estimated salvage value. The old printer's current market value is $4,576. If the new copier is acquired, the old printer will be sold to another company. The company's marginal…
QUESTION 2 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $65. The production cost of each heater is $50. The fixed cost of production is $58000. This project has an economic life of 11 years. The project requires an investment of $440000 in plants and equipment. This equipment will be depreciated using a straight line depreciation method to a salvage value of zero. The required rate of return for the project is 10.5 percent. The marginal corporate tax rate is 22 percent. Based on these assumptions, calculate the number of units of production at the accounting (net profit) break-even point. O 6133.33 O 6782.3 O 6533.33 O 6543
QUESTION 5 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $17. The production cost of each heater is $12. The fixed cost of production is $18000. This project has an economic life of 8 years. The project requires an investment of $185000 in plants and equipment. This equipment will be depreciated using a straight-line depreciation method to a salvage value of zero. The required rate of return for the project is 11 percent. The marginal corporate tax rate is 21 percent. Based on these assumptions, calculate the number of units of production at the net present value (financial) break-even point. O 11371.58 O 11485 O 11471.68 O 11215.37
QUESTION 3 Kobe Company has a factory machine with a book value of $90,000 and a remaining useful life of 5 years. It can be sold for $30,000. A new machine is available at a cost of $300,000. This machine will have a 5-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $600,000 to $500,000. In the table below, prepare an analysis showing whether the old machine should be retained or replaced. NET 4-YEAR RETAIN REPLACE INCOME EQUIPMENT EQUIPMENT INCREASE / (DECREASE) Variable manufacturing costs for 4 years: New machine cost Sale proceeds from old machine. Total What should be the decision of the company? Why? Justify your answer.
QUESTION 3 The executive management at Xuixa Ltd has decided to introduce a new product line. To achieve this, management has to invest in one of two (2) types of equipment. Option 1 The equipment ‘R’ will cost P200, 000 and is expected to have a life span of five (5) years with no residual value. The company would need to incur a cost of P40, 000 for safe disposal of the equipment at the end of its life span. It is estimated the equipment could yield net returns of P50, 000 in the first three years and net returns of P40, 000 in the last two years. Option 2 The equipment ‘S’ will cost 350,000 and its estimated useful life is four years. There will be no residual value. Acquiring this equipment will involve additional cost of training of P30, 000 for staff that will operate the equipment. It is estimated that the equipment could yield net returns of P80, 000 in the first year, P120, 000 in years 2-3 and P100, 000 in year 4. Required: For both options, calculate: The payback…
Problem 3. Century Contracting is thinking of opening a new warehouse, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV? IRR? What is your decision and why? Briefly discuss results. Project cost of capital (r) Opportunity cost Net equipment cost (depreciable basis) Straight-line deNtEC, rate for equipment Sales revenues, each year Operating costs (excl. deprec.), each year Tax rate 10.0% $100,000 $65,000 33.333% $123,000 $25,000 35%
Problem 6-36 Calculating a Bid Price Your company has been approached to bid on a contract to sell 18,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $4,600,000 and will be depreciated on a straight- line basis to a zero salvage value. Production will require an Investment in net working capital of $170,000 to be returned at the end of the project, and the equipment can be sold for $290,000 at the end of production. Fixed costs are $825,000 per year and variable costs are $39 per unit. In addition to the contract, you feel your company can sell 5,200, 12,800, 14,800, and 8,100 additional units to companies in other countries over the next four years, respectively, at a price of $130. This price is fixed. The tax rate Is 24 percent, and the required return is 12 percent. Additionally, the president of the…

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

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

SEE MORE TEXTBOOKS