You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $11.8 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,293,000, $1,725,000, $1,548,000, and $1,310,000 over these four years, what is the project's average accounting return (AAR)?

You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $11.8 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,293,000, $1,725,000, $1,548,000, and $1,310,000 over these four years, what is the project's average accounting return (AAR)?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

Consider equipment for the expansion of a production line that will cost $600,000 up front (i.e., today, t = 0). The production line will be depreciated using a 3-year straight-line schedule. At the end of Year 3, the used equipment will have no value. The new line will generate earnings according to the schedule below. What is the Average Accounting Return (AAR) of the new production facility? Answer with a number rounded to three decimal places, e.g., 4.0877% should be entered as 4.088. Year 01 Earnings = $24,500 Year 02 Earnings = $26,000 Year 03 Earnings = $27,250
You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $18.6 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,815,000, $2,145,000, $2,034,000, and $1,326,000 over these four years, what is the project’s average accounting return (AAR)? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Your company has been doing well, reaching $1.02 million in earnings, and is considering launching a new product. Designing the new product has already cost $510,000. The company estimates that it will sell 773,000 units per year for $3.05 per unit and variable non-labor costs will be $1.09 per unit. Production will end after year 3. New equipment costing $1.01 million will be required. The equipment will be depreciated to zero using the 7-year MACRS schedule. You plan to sell the equipment for book value at the end of year 3. Your current level of working capital is $302,000. The new product will require the working capital to increase to a level of $387,000 immediately, then to $399,000 in year 1, in year 2 the level will be $341,000, and finally in year 3 the level will return to $302,000. Your tax rate is 21%. The discount rate for this project is 9.7%. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the equipment is put into use in year…
Your firm is contemplating the purchase of a new $540,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $68,000 at the end of that time. You will be able to reduce working capital by $93,000 (this is a one-time reduction). The tax rate is 21 percent and the required return on the project is 9 percent. If the pretax cost savings are $150,000 per year, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Will you accept or reject the project? Accept Reject If the pretax cost savings are $115,000 per year, what is the NPV of this project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Will you accept or reject the project? Reject Accept At what level of pretax cost savings would you be indifferent between accepting the…
You are considering a new product launch. The project will cost $2,050,000, have a 4-year life, and have no salvage value; depreciation is straight-line to O. Sales are projected at 170 units per year; price per unit will be $26,000; variable cost per unit will be $17,000; and fixed costs will be $520,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10%. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios? (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round the final NPV answers to 2 decimal places. Omit $ sign in your response.) Scenario Base Best Worst ▸ Unit Sales $ Variable Cost $ $ $ units Fixed Costs $ $ $ NPV b. Evaluate the sensitivity of your base-case NPV to changes…
1. Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.82 million. The marketing department predicts that sales related to the project will be $2.52 million per year for the next four years, after which the firm expects to sell it for $500,000. The machine is a five-year class asset and will be depreciated down to zero over five years under the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. Howell also needs to add net working capital of $200,000 immediately. The additional net working capital will be recovered in full at the end of the project’s life. The corporate tax rate is 35 percent. The required rate of return (or discount rate) for the project is 12.5 percent. Compute the NPV, IRR, and payback period of the project. The firm’s acceptable payback period is 3 years. Is this project acceptable to the firm?
You are considering a new product launch. The project will cost $1,750,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 220 units per year; price per unit will be $20,000, variable cost per unit will be $13,000, and fixed costs will be $500,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 22 percent. a-1.The unit sales, variable cost, and fixed cost projections given above are probably accurate to within ±10 percent. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)a-2.What is the base-case NPV? What are the best-case and worst-case scenarios? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g.,…
The Carter Corporation, a firm in the 25% marginal tax bracket, with a 15% required rate of return or discount rate, is considering a new project. This project involves the introduction of a new product. This product is expected to last 5 years and then, because it is somewhat of a fad product, it will be terminated. Cost of new plant and equipment:$380,000,000 Shipping and installation costs: 20,000,000 Unit sales: YearUnits Sold 1 2,000,000 2 2,000,000 3 2,000,000 4 1,500,000 5 1,500,000 Sales price per unit: $800/unit in years 1-3 and $600/unit in years 4 and 5 Variable cost per unit: $400/unit throughout the five years Annual fixed costs: $250,000,000 There will be an initial working capital requirement of $2,000,000 just to get production started. At the conclusion of the project, the plant and equipment can be sold for $100,000,000. The plant and equipment will be depreciated over five years on a straight-line basis to a zero-salvage value. Required: a)…
Lobster Seafood Corp. is planning to build a new shipping depot. The initial cost of the investment is $1.18 million. Efficiencies from the new depot are expected to generate an annual after-tax cost reduction of $105,000 forever. The corporation has a total value of $65 million and has outstanding debt of $45 million. What is the NPV of the project if the firm has an aftertax cost of debt of 5.8 percent and a cost equity of 12.6 percent? $244,843 $150,409 $480,584 $67,715
Courses/88945/quizzes/289708/take Van Nuys Company Year Cash Flow Cost of Capital 12% %24 (7,370) 24 1 4,000 (2,000) 24 24 4,000 (2,000) 24 4,000 24 (2,000) $4 4,000 24 (2,000) 5 $4 4,000 (2,000) 24 24 6. 4,000 24 (2,000)
A corporation is considering a proposal for the purchase of a machine that will save $130,000 per year before taxes. The cost of operating the machine. including maintenance, is $20,000 per year. The machine will be needed for five years after which it will have a zero salvage value. MACRS depreciation will be used. assuming a three-year class life. The marginal income-tax rate is 40%. If the firm wants 12% IRR after taxes, how much can it afford to pay for this machine?