a.
Adequate information:
New sales units for the first year = 1,800
New sales units for the second year = 2,150
New sales units for the third year = 2,600
New sales units for the fourth year = 2,350
New sales units for the fifth year = 2,200
Per unit selling price of the new tables= $5,900
Variable cost of the new tables as a percentage of sales = 37%
Annual fixed costs of the new tables= $2.05 million
Begging inventory as a percentage of sales for both type of tables = 10%
Loss of oak tables per year = 250 units
Selling price of oak tables = $4,300
Variable cost of oak tables as a percentage of sales = 40%
Cost of equipment = $16 million
Pre-tax salvage value = $4.8 million
Tax rate = 21%
Require
To discuss: Whether the new project should be undertaken or not.
Introduction:
b.
Adequate information:
New sales units for the first year = 1,800
New sales units for the second year = 2,150
New sales units for the third year = 2,600
New sales units for the fourth year = 2,350
New sales units for the fifth year = 2,200
Per unit selling price of the new tables= $5,900
Variable cost of the new tables as a percentage of sales = 37%
Annual fixed costs of the new tables= $2.05 million
Begging inventory as a percentage of sales for both type of tables = 10%
Loss of oak tables per year = 250 units
Selling price of oak tables = $4,300
Variable cost of oak tables as a percentage of sales = 40%
Cost of equipment = $16 million
Pre-tax salvage value = $4.8 million
Tax rate = 21%
Require rate of return = 11%
To discuss: Whether
Introduction: IRR is the rate of return where the NPV of the project is zero.
c.
Adequate information:
New sales units for the first year = 1,800
New sales units for the second year = 2,150
New sales units for the third year = 2,600
New sales units for the fourth year = 2,350
New sales units for the fifth year = 2,200
Per unit selling price of the new tables= $5,900
Variable cost of the new tables as a percentage of sales = 37%
Annual fixed costs of the new tables= $2.05 million
Begging inventory as a percentage of sales for both type of tables = 10%
Loss of oak tables per year = 250 units
Selling price of oak tables = $4,300
Variable cost of oak tables as a percentage of sales = 40%
Cost of equipment = $16 million
Pre-tax salvage value = $4.8 million
Tax rate = 21%
Require rate of return = 11%
To interpret: The profitability index
Introduction: The profitability index is a capital budgeting tool that is used while analyzing a project’s value.
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Chapter 6 Solutions
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