Keener Clothiers Inc. is considering investing $2 million in an automatic sewing machine to produce a newly designed line of dresses. The dresses will be priced at $200, and management expects to sell 12,000 per year for six years. There is, however, some uncertainty about production costs associated with the new machine. The production department has estimated operating costs at 70% of revenues, but senior management realizes that this figure could turn out to be as low as 65% or as high as 75%. The new machine will be depreciated at a rate of $200,000 per year for six years (straight line, zero salvage). Keener’s cost of capital is 14% and its marginal tax rate is 35%. Calculate a point estimate along with best and worst case scenarios for the project’s NPV.
Q: A Corporation is considering to open an office in a new market area that would allow it to increase…
A: Formulas:
Q: ing could be purchased for sole use by the corporation at a total price of $4.5 million, of which…
A: The answer is stated below:
Q: Expando, Inc. is considering the possibility of building an additional factory that would produce a…
A: We need to apply the probability to future expected outcomes to assess its impact.
Q: The engineering team at Manuel’s Manufacturing, Inc., is planning to purchase an Enterprise Resource…
A: The internal rate of return (IRR) is one of the capital budgeting techniques to evaluate the…
Q: Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last…
A: The payback period is the time taken to recoup the initial investment net present value is the…
Q: Refer to the problem given in answering the following questions:(a) How long does it take to recover…
A: The pay-back period is a capital budgeting technique that is used to find out the period when…
Q: Flowton Products enjoys a steady demand for stainless steel infiltrators used in a number of…
A: The time it takes to recoup the value of an investment is mentioned because of the payback period.…
Q: than Butler, process engineer, knows that the acceptance of a new process design will depend on its…
A: Requirement1 Schedule of cash flow…
Q: Milberg Golf has decided to sell a new line of golf club. The clubs will sell for $1,000 per set…
A: Given: Cost of equipment $28,000,000 Depreciation schedule is 7 years MACRS
Q: Firms keep supplies of inventory for which of the following reasons? To provide a feeling of…
A: Hi, since there are multiple questions, I will answer the first question. Would request you to…
Q: Delaware Chemicals is considering the installation of a computer process control system in one of…
A: Computation of the inflows and outflows of the project is shown: Formula sheet is shown as follows:
Q: Shrieves Casting Company is considering adding a new line to its product mix, and the capital…
A: Incremental cash flow refers to the additional or extra operating cash flow that the firm gets from…
Q: Stanton Inc. is considering adding a new product line (the product code is XYZ). The company has…
A: “Since you have posted a question with multiple sub-parts, we will solve the first three sub- parts…
Q: The ABC Corporation is considering opening an office in a new market area that would allow it to…
A: Hello. Since you have posted multiple questions and not specified which question needs to be solved,…
Q: Your firm is thinking about investing $200,000 in the overhaul of a manufacturing cell in a lean…
A: Calculation of annual equivalent worth: Investment = $200,000 Revenues = $30,000 Expenses = $10,000…
Q: Teegin has just received a report indicating that KarlAuto could purchase the entire annual output…
A:
Q: Delaware Chemicals is considering the installation of a computer process control system in one of…
A: Workings:
Q: Rose Apothecary is considering expanding its business to include a second store. David Rose, the…
A: NPV is present value of cash flows less initial investment
Q: Todd Payne, the company’s operations manager, believes that the money should be used to expand the…
A: Net Present value Present value index
Q: Hemisphere, LLC is planning to outsource its 51-person information technology (IT) department to…
A: Present Value: The present value is the value of the sum received at time 0 or the current period.…
Q: Billingham Packaging is considering expanding its production capacity by purchasing a new machine,…
A: Given, Sales revenue (YEAR 1-10) = 10.05 million or 10,500,000 COGS…
Q: A large food-processing corporation is considering using laser technology to speed up and eliminate…
A: MARR stands for Minimum acceptable rate of return.It reflects this opportunity cost of capital.
Q: The sales and finance team of a car company is evaluating a new proposed luxury model of its brand…
A: Present worth computes the existing value of future benefits by discounting future worth with a…
Q: Delaware Chemicals is considering the installation of a computer process control system in one of…
A: a) Computation of cash inflows over the life of the project: Hence, the cash inflows over the life…
Q: Expando, Inc., is considering the possibility of building an additional factory that would produce a…
A: Expected value is the value that will be received in the future after deducting all the expenses.
Q: Eradicator Food Prep, Inc., has invested $7 million to construct a food irradiation plant, which…
A:
Q: Realforce is considering making a new mechanical keyboard. The company has spent $200,000 in…
A: The discount rate is the minimum rate at which the long-term project is evaluated so as to determine…
Q: Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The…
A: Calculate net present value of the investment.
Q: Diliman Republic Publishers, Inc. is considering replacing an old press that cost P800,000 six years…
A: Initial Investment for any new fixed asset or venture is not restricted to asset cost only. It…
Q: Billingham Packaging is considering expanding its production capacity by purchasing a new machine,…
A: The difference between the present value of cash inflows and outflows over time is known as net…
Q: The sales and finance team of a car company is evaluating a new proposed luxury model of its brand…
A: NPV is the net current worth of cash flows that are expected to occur in the future.
Q: Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards…
A: It is a discount rate at which the net present value equal to zero.
Q: The sales and finance team of a car company is evaluating a new proposed luxury model of its brand…
A:
Q: Vandalay Industries is considering the purchase of a new machine for the production of latex.…
A: EAC (equivalent annual cost) is the term that can be used in many steams but it is mainly related to…
Q: The engineering team at Manuel’s Manufacturing, Inc., is planning to purchase an enterprise resource…
A: The future worth analysis is the analysis of a project based on the future worth of a project, It is…
Q: The sales and finance team of a car company is evaluating a new proposed luxury model of its brand…
A: Present worth analysis is an analysis in which we convert all the cash flows to present worth using…
Q: The sales and finance team of a car company is evaluating a new proposed luxury model of itsbrand…
A: Net present value (NPV) is an amount that indicates net cash flows (inflows minus outflows) from a…
Q: A small office building could be purchased for sole use by the corporation at a total price of $5.3…
A: In this question , we would be preparing cashflow statement for the ABC Corporation. Note #…
Q: Heyden Motion Solutions ordered $7 million worth of seamless tubes for manufacturing their high…
A: Given, r=15% annual cost = $860,000 initial investment = $7000,000 n=3 years
Q: Knight Shades Inc. is considering adding new line of sunglasses to their designer series. The…
A: Cost of Plant & Equipment : $12,000,000 Estimated life: 7 Years Depreciation per year:…
Q: Expando, Inc. is considering the possibility of building an additional factory that would produce a…
A: NPV = Present value of cash inflows - initial investment
Q: termined the company will sell 80,000 sets per year for seven years. The company also plans to offer…
A: Step 1 An income statement is a statement that depicts how profitable entity’s business was over a…
Q: The sales and finance team of a car company is evaluating a new proposed luxury model of its brand…
A: Present value: This is the amount of future value reduced or discounted at a rate of interest till…
Q: The sales and finance team of a car company is evaluating a new proposed luxury model of its brand…
A: a. The calculation is: NPV is negative. Hence, the proposed investment is not a profitable…
Q: Billingham Packaging is considering expanding its production capacity by purchasing a new machine,…
A: Answer machine XC-900 have Greater capacity. But extra capacities could not meet in first 2…
Q: Vandalay industries is considering the purchase of a new machine for the production of latex.…
A: Equivalent annual cost (EAC) is used to compare two assets which have different life spans. It…
Keener Clothiers Inc. is considering investing $2 million in an automatic sewing machine to produce a newly designed line of dresses. The dresses will be priced at $200, and management expects to sell 12,000 per year for six years. There is, however, some uncertainty about production costs associated with the new machine. The production department has estimated operating costs at 70% of revenues, but senior management realizes that this figure could turn out to be as low as 65% or as high as 75%. The new machine will be
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 3 images
- Nico Parts, Inc., produces electronic products with short life cycles (of less than two years). Development has to be rapid, and the profitability of the products is tied strongly to the ability to find designs that will keep production and logistics costs low. Recently, management has also decided that post-purchase costs are important in design decisions. Last month, a proposal for a new product was presented to management. The total market was projected at 200,000 units (for the two-year period). The proposed selling price was 130 per unit. At this price, market share was expected to be 25 percent. The manufacturing and logistics costs were estimated to be 120 per unit. Upon reviewing the projected figures, Brian Metcalf, president of Nico, called in his chief design engineer, Mark Williams, and his marketing manager, Cathy McCourt. The following conversation was recorded: BRIAN: Mark, as you know, we agreed that a profit of 15 per unit is needed for this new product. Also, as I look at the projected market share, 25 percent isnt acceptable. Total profits need to be increased. Cathy, what suggestions do you have? CATHY: Simple. Decrease the selling price to 125 and we expand our market share to 35 percent. To increase total profits, however, we need some cost reductions as well. BRIAN: Youre right. However, keep in mind that I do not want to earn a profit that is less than 15 per unit. MARK: Does that 15 per unit factor in preproduction costs? You know we have already spent 100,000 on developing this product. To lower costs will require more expenditure on development. BRIAN: Good point. No, the projected cost of 120 does not include the 100,000 we have already spent. I do want a design that will provide a 15-per-unit profit, including consideration of preproduction costs. CATHY: I might mention that post-purchase costs are important as well. The current design will impose about 10 per unit for using, maintaining, and disposing our product. Thats about the same as our competitors. If we can reduce that cost to about 5 per unit by designing a better product, we could probably capture about 50 percent of the market. I have just completed a marketing survey at Marks request and have found out that the current design has two features not valued by potential customers. These two features have a projected cost of 6 per unit. However, the price consumers are willing to pay for the product is the same with or without the features. Required: 1. Calculate the target cost associated with the initial 25 percent market share. Does the initial design meet this target? Now calculate the total life-cycle profit that the current (initial) design offers (including preproduction costs). 2. Assume that the two features that are apparently not valued by consumers will be eliminated. Also assume that the selling price is lowered to 125. a. Calculate the target cost for the 125 price and 35 percent market share. b. How much more cost reduction is needed? c. What are the total life-cycle profits now projected for the new product? d. Describe the three general approaches that Nico can take to reduce the projected cost to this new target. Of the three approaches, which is likely to produce the most reduction? 3. Suppose that the Engineering Department has two new designs: Design A and Design B. Both designs eliminate the two nonvalued features. Both designs also reduce production and logistics costs by an additional 8 per unit. Design A, however, leaves post-purchase costs at 10 per unit, while Design B reduces post-purchase costs to 4 per unit. Developing and testing Design A costs an additional 150,000, while Design B costs an additional 300,000. Assuming a price of 125, calculate the total life-cycle profits under each design. Which would you choose? Explain. What if the design you chose cost an additional 500,000 instead of 150,000 or 300,000? Would this have changed your decision? 4. Refer to Requirement 3. For every extra dollar spent on preproduction activities, how much benefit was generated? What does this say about the importance of knowing the linkages between preproduction activities and later activities?Mallette Manufacturing, Inc., produces washing machines, dryers, and dishwashers. Because of increasing competition, Mallette is considering investing in an automated manufacturing system. Since competition is most keen for dishwashers, the production process for this line has been selected for initial evaluation. The automated system for the dishwasher line would replace an existing system (purchased one year ago for 6 million). Although the existing system will be fully depreciated in nine years, it is expected to last another 10 years. The automated system would also have a useful life of 10 years. The existing system is capable of producing 100,000 dishwashers per year. Sales and production data using the existing system are provided by the Accounting Department: All cash expenses with the exception of depreciation, which is 6 per unit. The existing equipment is being depreciated using straight-line with no salvage value considered. The automated system will cost 34 million to purchase, plus an estimated 20 million in software and implementation. (Assume that all investment outlays occur at the beginning of the first year.) If the automated equipment is purchased, the old equipment can be sold for 3 million. The automated system will require fewer parts for production and will produce with less waste. Because of this, the direct material cost per unit will be reduced by 25 percent. Automation will also require fewer support activities, and as a consequence, volume-related overhead will be reduced by 4 per unit and direct fixed overhead (other than depreciation) by 17 per unit. Direct labor is reduced by 60 percent. Assume, for simplicity, that the new investment will be depreciated on a pure straight-line basis for tax purposes with no salvage value. Ignore the half-life convention. The firms cost of capital is 12 percent, but management chooses to use 20 percent as the required rate of return for evaluation of investments. The combined federal and state tax rate is 40 percent. Required: 1. Compute the net present value for the old system and the automated system. Which system would the company choose? 2. Repeat the net present value analysis of Requirement 1, using 12 percent as the discount rate. 3. Upon seeing the projected sales for the old system, the marketing manager commented: Sales of 100,000 units per year cannot be maintained in the current competitive environment for more than one year unless we buy the automated system. The automated system will allow us to compete on the basis of quality and lead time. If we keep the old system, our sales will drop by 10,000 units per year. Repeat the net present value analysis, using this new information and a 12 percent discount rate. 4. An industrial engineer for Mallette noticed that salvage value for the automated equipment had not been included in the analysis. He estimated that the equipment could be sold for 4 million at the end of 10 years. He also estimated that the equipment of the old system would have no salvage value at the end of 10 years. Repeat the net present value analysis using this information, the information in Requirement 3, and a 12 percent discount rate. 5. Given the outcomes of the previous four requirements, comment on the importance of providing accurate inputs for assessing investments in automated manufacturing systems.Artisan Metalworks has a bottleneck in their production that occurs within the engraving department. Jamal Moore, the COO, is considering hiring an extra worker, whose salary will be $55,000 per year, to solve the problem. With this extra worker, the company could produce and sell 3,000 more units per year. Currently, the selling price per unit is $25 and the cost per unit is $7.85. Using the information provided, calculate the annual financial impact of hiring the extra worker.
- Buckingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.25 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $50,000 feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates: Marketing: Once the XC-750 is operating next year, the extra capacity is expected to generate $10.5 million per year in additional sales, which will continue for the 10-year life of the machine. Operations: The disruption caused by the installation will decrease sales by $5 million this year (year 0). Once the machine is operating next year, the cost of goods for the products produced by the XC-750 is expected to be 70% of their sale price. The increased production will require additional inventory on hand of $2.0 million, to be added in year 0 and depleted in year 10. Human Resources: The expansion…Expando, Inc. is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $5 million. If demand for new products is low, the company expects to receive $10 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $10 million. Were demand to be low, the company would expect $13 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $16 million. In either case, the probability of demand being high is 0.70, and the probability of it being low is 0.30. Not constructing a new factory would result in no additional revenue being generated because…Expando, Inc. is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $7 million. If demand for new products is low, the company expects to receive $11 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $14 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $12 million. Were demand to be low, the company would expect $13 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $17 million. In either case, the probability of demand being high is 0.50, and the probability of it being low is 0.50. Not constructing a new factory would result in no additional revenue being generated because…
- Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.77 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $45,000 feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates: • Marketing: Once the XC-750 is operational next year, the extra capacity is expected to generate $10.05 million per year in additional sales, which will continue for the 10-year life of the machine. • Operations: The disruption caused by the installation will decrease sales by $5.09 million this year. As with Billingham's existing products, the cost of goods for the products produced by the XC-750 is expected to be 72% of their sale price. The increased production will also require increased inventory on hand of $1.11 million during the life of the project, including year 0. • Human Resources: The…Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.77 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $45,000 feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates: • Marketing: Once the XC-750 is operational next year, the extra capacity is expected to generate $10.05 million per year in additional sales, which will continue for the 10-year life of the machine. • Operations: The disruption caused by the installation will decrease sales by $5.09 million this year. As with Billingham's existing products, the cost of goods for the products produced by the XC-750 is expected to be 72% of their sale price. The increased production will also require increased inventory on hand of $1.11 million during the life of the project, including year 0. • Human Resources: The…Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.77 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $45,000 feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates: • Marketing: Once the XC-750 is operational next year, the extra capacity is expected to generate $10.05 million per year in additional sales, which will continue for the 10-year life of the machine. • Operations: The disruption caused by the installation will decrease sales by $5.09 million this year. As with Billingham's existing products, the cost of goods for the products produced by the XC-750 is expected to be 72% of their sale price. The increased production will also require increased inventory on hand of $1.11 million during the life of the project, including year 0. • Human Resources: The…
- Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.68 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $46,000 feasibility study to analyze the decision to buy the XC-750, resulting in the following estimates: • Marketing: Once the XC-750 is operational next year, the extra capacity is expected to generate $10.20 million per year in additional sales, which will continue for the 10-year life of the machine. Operations: The disruption caused by the installation will decrease sales by $5.01 million this year. As with Billingham's existing products, the cost of goods for the products produced by the XC-750 is expected to be 69% of their sale price. The increased production will also require increased inventory on hand of $1.12 million during the life of the project, including year 0. • Human Resources: The…Expando, Inc, is considering the possibility of building an additional factory that would produce a new addition to their product line. The company is currently considering three options.The first is a small facility that it could build at a cost of $6 million. If demand for new products is tow, the company expects to receive $8 million in discounted revenues (present value of future revenues) with the small facility.On the other hand, if demand is high it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $9 million. Were demand to be low, the company would expect $10 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $14 million.The third option is to outsource their production, it would cost them nothing. The company would expect to receive $1.6 million in discounted revenues if the demand was low and $3.1 million if the demand…eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $50,000 to purchase and install and $32,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $58,000 per year. The firm’s cost of capital (discount rate) is 11%. a.The firm is not yet profitable and therefore pays no income taxes. b.The firm is in the 26% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. c. The firm is in the 26% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 × 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year. 1. What is the internal rate of return (IRR) of the proposed investment for…