None RET Inc. currently has two products, low and high priced stoves. REX Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $600 a year. Variable costs are 60% of sales. Theproject is expected to last 10 years. Also, non - variable costs are $200 per year. The company has spent $100 in researchand a marketing study that determined the company will have synergy gains/sales of $200 a year from sales of itsexisting high-priced stoves. The production variable cost of these sales is $100 a year. The plant and equipmentrequired for producing the new line of stoves costs $300 and will be depreciated down to zero over 30 years usingstraight-line depreciation. It is expected that the plant and equipment can be sold (salvage value) for $50 at the end of10 years. The new stoves will also require today an increase in net working capital of $20 that will be returned at the endof the project. The tax rate is 20 percent and the cost of capital is 10%.

Part 2: Explanation:Step 1: Calculate the annual cash flows associated with the project. - Sales…

Answered: RET Inc. currently has two products,…

Essentials Of Business Analytics

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Chapter11: Monte Carlo Simulation

Section: Chapter Questions

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Keleher Industries manufactures pet doors and sells them directly to the consumer via their web site. The marketing manager believes that if the company invests in new software, they will increase their sales by 10%. The new software will increase fixed costs by $400 per month. Prepare a forecasted contribution margin income statement for Keleher Industries reflecting the new software cost and associated increase in sales. The previous annual statement is as follows:
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.
Shelby Industries has a capacity to produce 45.000 oak shelves per year and is currently selling 40,000 shelves for $32 each. Martin Hardwoods has approached Shelby about buying 1,200 shelves for a new project and is willing to pay $26 each. The shelves can be packaged in bulk; this saves Shelby $1.50 per shelf compared to the normal packaging cost. Shelves have a unit variable cost of $27 with fixed costs of $350,000. Because the shelves dont require packaging, the unit variable costs for the special order will drop from $27 per shelf to $25.50 per shelf. Shelby has enough idle capacity to accept the contract. What is the minimum price per shelf that Shelby should accept for this special order?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
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McGilla Golf has decided to sell a new line of golf clubs. The company would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. The clubs will sell for $825 per set and have a variable cost of $385 per set. The company has spent $260,000 for a marketing study that determined the company will sell 68,200 sets per year for seven years. The marketing study also determined that the company will lose sales of 12,200 sets of its high-priced clubs. The high-priced clubs sell at $1,195 and have variable costs of $655. The company will also increase sales of its cheap clubs by 14,200 sets. The cheap clubs sell for $415 and have variable costs of $205 per set. The fixed costs each year will be $10,350,000. The company has also spent $2,100,000 on research and development for the new clubs. The plant and equipment required will cost $38,400,000 and will be depreciated on a straight-line basis. The new clubs will also require an…
Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $170,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $885,000 per year. The fixed costs associated with this will be $224,000 per year, and variable costs will amount to 20 percent of sales. The equipment necessary for production of the Potato Pet will cost $950,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy's has a tax rate of 25 percent and a required return of 14 percent. a. Calculate the payback period for this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Calculate the NPV for this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.,…
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Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $121,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $576,000 per year. The fixed costs associated with this will be $180,000 per year, and variable costs will amount to 21 percent of sales. The equipment necessary for production of the Potato Pet will cost $622,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy's has a tax rate of 35 percent and a required return of 14 percent. Calculate the payback period for this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Calculate the NPV for this project. (Do not round intermediate calculations and round your answer to 2 decimal places,…
Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $160,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $875,000 per year. The fixed costs associated with this will be $220,000 per year, and variable costs will amount to 24 percent of sales. The equipment necessary for production of the Potato Pet will cost $930,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy's has a tax rate of 23 percent and a required return of 16 percent. a. Calculate the payback period for this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. Calculate the NPV for this project. Note: Do not round intermediate calculations and round your answer to 2 decimal…
Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $175,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $890,000 per year. The fixed costs associated with this will be $226,000 per year, and variable costs will amount to 22 percent of sales. The equipment necessary for production of the Potato Pet will cost $960,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy's has a tax rate of 21 percent and a required return of 15 percent. Calculate the payback period for this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Calculate the NPV for this project. Note: Do not round intermediate calculations and round your answer to 2 decimal…

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