Determine the variable cost per unit Determine the new profit if the change is made What is the incremental profit?
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- Determine the variable cost per unit
- Determine the new profit if the change is made
- What is the incremental profit?
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- Banyan Industries has two divisions, a tax rate of 30%, and a minimum rate of return of 20%. Division A has a weighted average cost of Capital of 9.5% and is looking at a new project that will generate a profit of $1,200,000 from a machine that costs $4,000,000. Division B has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,350,000 from a machine that costs $5,000.000. A. Calculate the EVA for each of Banyans divisions. B. Calculate the RI for each of Banyans division. C. If Banyan uses EVA to evaluate the projects, which division has the better project and by how much? D. If Banyan uses RI, which division has the better project and by how much? E. What are some of the reasons for the similarity or difference that you found in the use of EVA versus RI?Your division is considering two investment projects, each of which requires an up-front expenditure of 25 million. You estimate that the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars): a. What is the regular payback period for each of the projects? b. What is the discounted payback period for each of the projects? c. If the two projects are independent and the cost of capital is 10%, which project or projects should the firm undertake? d. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake? e. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake? f. What is the crossover rate? g. If the cost of capital is 10%, what is the modified IRR (MIRR) of each project?Gamut Satellite Inc. produces satellite earth stations that sell for $150,000 each. The firm’s fixed costs, F, are $1.5 million, 20 earth stations are produced and sold each year, profits total $400,000, and the firm’s assets (all equity financed) are $5 million. The firm estimates that it can change its production process, adding $10 million to assets and $500,000 to fixed operating costs. This change will reduce variable costs per unit by $5,000 and increase output by 30 units. However, the sales price on all units must be lowered to $140,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 18%, and it uses no debt. What is the projects expected rate of return for the next year (defined as the incremental profit divided by the investment)? Should the firm make the investment? Why or why not? Would the firm’s break-even point increase or decrease if it made the change?
- Gamut Satellite Inc. produces satellite earth stations that sell for $150,000 each. The firm’s fixed costs, F, are $1.5 million, 20 earth stations are produced and sold each year, profits total $400,000, and the firm’s assets (all equity financed) are $5 million. The firm estimates that it can change its production process, adding $10 million to assets and $500,000 to fixed operating costs. This change will reduce variable costs per unit by $5,000 and increase output by 30 units. However, the sales price on all units must be lowered to $140,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 18%, and it uses no debt. Would the new situation expose the firm to more or less business risk than the old one? Show workingsSchweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm's fixed costs, F, are $3 million, 50 earth stations are produced and sold each year, profits total $400,000, and the firm's assets (all equity financed) are $4 million. The firm estimates that it can change its production process, adding $3 million to assets and $500,000 to fixed operating costs. This change will reduce variable costs per unit by $12,000 and increase output by 25 units. However, the sales price on all units must be lowered to $90,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 17%, and it uses no debt. a. What is the incremental profit? Enter your answer in dollars. For example, an answer of $4 million should be entered as 4,000,000, not 4. Round your answer to the nearest dollar. $ To get a rough idea of the project's profitability, what is the project's expected rate of return for the…Schweser satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm's fixed cost, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000, and the firm's assets (all equity financed) are $5 million. The firm estimates that it can change its production process, adding $4 million to investment and $500,000 to fixed operating costs. This change will: 1. reduce the variable costs per unit by $10,000 and 2. increase output by 20 units, but 3. the sales price on all units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax loss carryforwards that renders its tax rate 0, its cost of equity is 16%, and it uses no debt. what is the incremental profit? What is the project’s expected return next year? should the firm make the investment? Would the firm break-even point increase or decrease if it mane the change Would the new situation expose the firm to more or less business risk than the…
- Schweser Satellites Inc. produces satellite earth stations that sell for $105,000 each. The firm's fixed costs, F, are $3 million, 50 earth stations are produced and sold each year, profits total $600,000, and the firm's assets (all equity financed) are $4 million. The firm estimates that it can change its production process, adding $3 million to assets and $400,000 to fixed operating costs. This change will reduce variable costs per unit by $10,000 and increase output by 20 units. However, the sales price on all units must be lowered to $100,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 13%, and it uses no debt. What is the incremental profit? Enter your answer in dollars. For example, an answer of $4 million should be entered as 4,000,000, not 4. Round your answer to the nearest dollar. $ To get a rough idea of the project's profitability, what is the project's expected rate of return for…Sandro Aero Inc. produces satellite earth station that sells for RM100,000 each. The firm’s fixed cost are RM2 million, 50 earth stations are produced and sold each year, profits total RM500,000 and the firm’s assets (all equity financed) are RM5 million. The firm estimates that it can change its production process, adding RM4 million to investment and RM500,000 to fixed operating costs. This change will: Reduce variable cost per unit by RM10,000 Increase output by 20 units The sales price on all units will have to be lowered to RM95,000 The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 16% and uses no debt. What is the incremental profit? What is the project’s expected return next year? Should the firm make the investment? Would the firm break-even point increase or decrease if it made the change? Would the new situation expose the firm to more or less business risk than the old one?Schweser Satellites Inc. produces satellite earth stations that sell for $95,000 each. The firm's fixed costs, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000; and the firm's assets (all equity financed) are $6 million. The firm estimates that it can change its production process, adding $3.5 million to investment and $320,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $8,000 and (2) increase output by 19 units, but (3) the sales price on all units will have to be lowered to $87,000 to permit sales of the additional output. The firm has tax loss carry forwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. ▬▬▬▬▬ Open spreadsheet a. What is the incremental profit? $ To get a rough idea of the project's profitability,…
- Olinde Electronics Inc. producesstereo components that sell at P= $100 per unit. Olinde’s fixed costs are $200,000, variable costs are $50 per unit, 5,000 components are produced and sold each year, EBIT is currently $50,000, and Olinde’s assets (all equity-financed) are $500,000. Olinde can change itsproduction process by adding $400,000 to assets and $50,000 to fixed operating costs. Thischange would (1) reduce variable costs per unit by $10 and (2) increase output by 2,000units, but (3) the sales price on all units would have to be lowered to $95 to permit sales ofthe additional output. Olinde has tax loss carry-forwards that cause its tax rate to be zero,it uses no debt, and its average cost of capital is 10%.a. Should Olinde make the change? Why or why not?b. Would Olinde’s break-even point increase or decrease if it made the change?c. Suppose Olinde was unable to raise additional equity financing and had to borrow the$400,000 at an interest rate of 10% to make the investment. Use…Oleck Inc. produces stereo components that sell at P = $100 per unit. Oleck’s fixed costs are $200,000, variable costs are $50 per unit, 5,000 components are produced and sold each year, EBIT is currently $50,000, and Oleck’s assets (all equity-financed) are $500,000. Oleck can change its production process by adding $400,000 to assets and $50,000 to fixed operating costs. This change would (1) reduce variable costs per unit by $10 and (2) increase output by 2,000 units, but (3) the sales price on all units would have to be lowered to $95 to permit sales of the additional output. Oleck has tax loss carry-forwards that cause its tax rate to be zero, it uses no debt, and its average cost of capital is 10%. Suppose Oleck was unable to raise additional equity financing and had to borrow the $400,000 at an interest rate of 10% to make the investment. Use the DuPont equation to find the expected ROA of the investment. Calculate incremental ROA. Should Oleck make the change if debt financing…Oleck Inc. produces stereo components that sell at P = $100 per unit. Oleck’s fixed costs are $200,000, variable costs are $50 per unit, 5,000 components are produced and sold each year, EBIT is currently $50,000, and Oleck’s assets (all equity-financed) are $500,000. Oleck can change its production process by adding $400,000 to assets and $50,000 to fixed operating costs. This change would (1) reduce variable costs per unit by $10 and (2) increase output by 2,000 units, but (3) the sales price on all units would have to be lowered to $95 to permit sales of the additional output. Oleck has tax loss carry-forwards that cause its tax rate to be zero, it uses no debt, and its average cost of capital is 10%. Would Oleck’s break-even point increase or decrease if it made the change? Calculate old and new break-even points a) Old break-even point = units b) New break-even point = units c) Increase or decrease?
