Your company has been doing well, reaching $1.05 million in earnings, and is considering launching a new product. Designing the new product has already cost $534,000. The company estimates that it will sell 791,000 units per year for $2.94 per unit and variable non-labor costs will be $1.08 per unit. Production will end after year 3. New equipment costing $1.19 million will be required. The equipment will be depreciated using 100% bonus depreciation under the 2017 TCJA. You think the equipment will be obsolete at the end of year 3 and plan to scrap it. Your current level of working capital is $304,000. The new product will require the working capital to increase to a level of $380,000 immediately, then to $403,000 in year 1, in year 2 the level will be $359,000, and finally in year 3 the level willl return to $304,000. Your tax rate is 21%. The discount rate for this project is 9.6%. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year 1. Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.) Year 0 Year 1

Your company has been doing well, reaching $1.05 million in earnings, and is considering launching a new product. Designing the new product has already cost $534,000. The company estimates that it will sell 791,000 units per year for $2.94 per unit and variable non-labor costs will be $1.08 per unit. Production will end after year 3. New equipment costing $1.19 million will be required. The equipment will be depreciated using 100% bonus depreciation under the 2017 TCJA. You think the equipment will be obsolete at the end of year 3 and plan to scrap it. Your current level of working capital is $304,000. The new product will require the working capital to increase to a level of $380,000 immediately, then to $403,000 in year 1, in year 2 the level will be $359,000, and finally in year 3 the level willl return to $304,000. Your tax rate is 21%. The discount rate for this project is 9.6%. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year 1. Complete the capital budgeting analysis for this project below: (Round to the nearest dollar.) Year 0 Year 1

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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A company is developing a new product. The development of the product requires an initial investment of $150,000 with further investments of $70,000 in year 1, $40,000 in year 2 and $20,000 in year 3. The company will launch the product on the market in year 3 and the company expects annual profits of $40,000 from year 3 to year 8. At the end of year 8, the company expects to terminate the production line and sell it to a competitor for $70,000. The company's required rate of return is 7%. a. Calculate the NPV for this product. -$37,562.00 8) Round to the nearest cent b. Should the company proceed with developing the product?
Lukow Products is investigating the purchase of a piece of automated equipment that will save $150,000 each year in direct labor and inventory carrying costs. This equipment costs $800,000 and is expected to have a 5-year useful life with no salvage value. The company’s required rate of return is 12% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higher-quality output that will result in additional future cash inflows. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using table. Required: 1. What is the net present value of the piece of equipment before considering its intangible benefits? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.) 2. What minimum dollar value per year must be provided by the equipment’s intangible benefits to justify the $800,000 investment? (Do not round intermediate…
Beacon Company is considering automating its production facility. The initial investment in automation would be $9.23 million, and the equipment has a useful life of 8 years with a residual value of $1,070,000. The company will use straight-line depreciation. Beacon could expect a production increase of 40,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Current (no automation) 80,000 units Proposed (automation) 120,000 units Per Unit Total Per Unit Total Sales revenue $ 91 $ ? $ 91 $ ? Variable costs Direct materials $ 17 $ 17 Direct labor 30? Variable manufacturing overhead 9 9 Total variable manufacturing costs 56? Contribution margin $ 35 ? $ 41 ? Fixed manufacturing costs 1,140,000 2,260,000 Net operating income ? ? Required: 3. Determine the project's payback period.
Your firm is contemplating the purchase of a new $515,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $53,000 at the end of that time. You will save $153,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $78,000 (this is a one-time reduction). If the tax rate is 21 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR %
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Your firm is contemplating the purchase of a new $435,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 6-year life. It will be worth $54,000 at the end of that time. You will save $157,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $43,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. If the tax rate is 23 percent, what is the IRR for this project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. IRR 25.73 %
Beacon Company is considering automating its production facility. The initial investment in automation would be $7.52 million, and the equipment has a useful life of 6 years with a residual value of $1,100,000. The company will use straight- line depreciation. Beacon could expect a production increase of 47,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Sales revenue Variable costs Direct materials Direct labor Variable manufacturing overhead Total variable manufacturing costs Contribution margin Fixed manufacturing costs Net operating income Required: 1-a. Complete the following table showing the totals. Current (no automation) 81,000 Proposed (automation) 128,000 units units Per Unit $94 $ 17 30 9 56 $38 Total $ ? ? 1,240,000 ? Per Unit $94 $ 17 ? 9 ? $44 Total $ ? ? 2,200,000 ?
A chemical company is planning to release a new brand of insecticide that will kill many insect pests but not harm useful pollinators. Buying new equipment to manufacture the product will cost $15 million. The equipment is expected to have a lifetime of nine years and will be depreciated by the straight-line method over its lifetime. The firm expects that they should be able to sell 1,400,000 gallons per year at a price of $65 per gallon. It will take $36 per gallon to manufacture and support the product. If the company's marginal tax rate is 40%, what are the incremental earnings after tax in year 3 of this project? $23.36 million $9.58 million $12.72 million $15.30 million $14.30 million $24.36 million
Lukow Products is investigating the purchase of a piece of automated equipment that will save $130,000 each year in direct labor and inventory carrying costs. This equipment costs $780,000 and is expected to have a 6-year useful life with no salvage value. The company's required rate of return is 10% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higher-quality output that will result in additional future cash inflows. Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using table. Required: 1. What is the net present value of the piece of equipment before considering its intangible benefits? Note: Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount. 2. What minimum dollar value per year must be provided by the equipment's intangible benefits to justify the $780,000 investment? Note: Do not round…
Your firm is contemplating the purchase of a new $615,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $97,000 at the end of that time. You will save $192,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $112,000 (this is a one-time reduction). If the tax rate is 23 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
You are considering a new product line for your business. The new product line will require investment of $3,000,000 in new equipment. The equipment will be trucked to your facility at a cost of $25,000 and will require another $250,000 to modify that equipment for use in your facility. The new product line will require an increase in inventory of $200,000, an increase in accounts receivable of $100,000, but you believe you will be able to get suppliers to offer good credit terms which should increase accounts payable by $250,000, and you will obtain a short term bank loan, increasing notes payable by $25,000. The equipment falls into the 3- year MACRS class (rates of 33%, 45%, 15%, and 7% in years 1-4, respectively). You expect to operate the new product line for only three years and then shut down operations. The salvage value of the equipment at time three is expected to be $385,000. The new product line is expected to lead to sales of $1.4 million the first year with inflation of…
The plant manager of Orlando Electronics Company is considering the purchase of new automated assembly equipment. The new equipment will cost $275,000. The manager believes that the new investment will result in direct labor savings of $55,000 per year for 10 years. Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 a. What is the payback period on this project?fill in the blank 1 of 1 years b. What is the net present value, assuming a 10% rate of return? Use the table provided above. Round to the nearest whole dollar.Net present value fill in the blank 1 of 1$ c. What else should the manager consider in the analysis?

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