*9 Your company has been doing well, reaching $1.06 million in earnings, and is considering launching a new product.Designing the new product has already cost $497,000. The company estimates that it will sell 827,000 units peryear for $2.96 per unit and variable non-labor costs will be $1.18 per unit. Production will end after year 3. Newequipment costing $1.06 million will be required. The equipment will be depreciated to zero using the 7-yearMACRS schedule. You plan to sell the equipment for book value at the end of year 3. Your current level of workingcapital is $309,000. The new product will require the working capital to increase to a level of $372,000 immediately,then to $408,000 in year 1, in year 2 the level will be $358,000, and finally in year 3 the level will return to$309,000. Your tax rate is 21%. The discount rate for this project is 10.2%. Do the capital budgeting analysis for thisproject and calculate its NPVNote Assume that the equipment is put into use in year 1.www.(irrelevant). (Select from the drop-down menu)Design already happened and is sunk.According to the 7-year MACRS schedule, depreciation in year 1 will be $(Round to the nearest dollar)

Net Present Value is also known as NPV. It is a capital budgeting techniques which help in decision…

Answered: Your company has been doing well,…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 17EB: Caduceus Company is considering the purchase of a new piece of factory equipment that will cost...

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Your company has been doing well, reaching $1 million in earnings, and is considering launching a new product. Designing the new product has already cost $500,000. The company estimates that it will sell 820,000 units per year for $6.75 per unit and variable non-labor costs will be $1.5 per unit. Production will end after year 3. New equipment costing $1 million will be required. The equipment will be put into use in year 1 and 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 $310,000. The new product will require the working capital to increase to a level of $450,000 immediately, then to $465,000 in year 1, in year 2 the level will be $320,000, and finally in year 3 the level will return to $310,000. Your tax rate is 21%. The discount rate for this project is 10%. Do the capital budgeting analysis for this project and calculate its NPV.
QUESTION IS IN IMAGE Your company has been doing well, reaching $1.09 million in earnings, and is considering launching a new product. Designing the new product has already cost $513,000. The company estimates that it will sell 814,000 units per year for $2.99 per unit and variable non-labor costs will be $1.03 per unit. Production will end after year 3. New equipment costing$1.12 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 $301,000. The new product will require the working capital to increase to a level of $381,000 immediately, then to $400,000 in year 1, in year 2 the level will be $354,000, and finally in year 3 the level will return to$301,000. Your tax rate is 21%. The discount rate for this project is 9.8%. Do the capital budgeting analysis for this project and calculate its NPV.Note: Assume that the equipment is put…
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 company has been doing well, reaching $1.05 million in earnings, and is considering launching a new product. Designing the new product has already cost $534,000. The company estimates that it will sell 791,000 units per year for $2.94 per unit and variable non-labor costs will be $1.08 per unit. Production will end after year 3. New equipment costing $1.19 million will be required. The equipment will be depreciated using 100% bonus depreciation under the 2017 TCJA. You think the equipment will be obsolete at the end of year 3 and plan to scrap it. Your current level of working capital is $304,000. The new product will require the working capital to increase to a level of $380,000 immediately, then to $403,000 in year 1, in year 2 the level will be $359,000, and finally in year 3 the level will return to $304,000. Your tax rate is 21%. The discount rate for this project is 9.6%. Do the capital budgeting analysis for this project and calculate its NPV. Note: Assume that the…
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Beacon Company is considering automating its production facility. The initial investment in automation would be $6.46 million, and the equipment has a useful life of 5 years with a residual value of $1,060,000. The company will use straight-line depreciation. Beacon could expect a production increase of 43,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Sales revenue Variable costs Direct materials Direct labor Variable manufacturing overhead Total variable manufacturing costs Contribution margin Fixed manufacturing costs Net operating income. Per Unit $ 98 Net present value $18 25 11 54 $44 Current (no automation) 76,000 units Total $ ? ? $1,220,000 ? Proposed (automation) 119,000 units Per Unit $98 $18 ? 11 ? $49 Total $? ? $ 2,190,000 ? Check my we 5. Recalculate the NPV using a 10 percent discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate…
Wemham-Miffin is considering launching a new line of septagonal-shaped paper. You have the following information: • Revenues due to the sale of the new product are expected to be $95 million annually. Of this, 77% will be by cash with the remainder sold on credit. Credit sales are expected to start being repaid after 2 years. • Total paper production costs will increase from the current level of $20 million annually to $51 million annually after the product launch. • Hyper-aggressive sales agent Dwight Schrute will be reassigned from other projects to sell the new product line. Customers of those other products will be relieved and sales will increase by $18 million annually. • The project will make use of an existing paper mill, built last year at a cost of $43 million. The mill is being depreciated using prime cost over a useful life of twenty-seven years. • However, due to this decision, machinery in the mill will need to be retrofit at a cost of $27 million at t=0. The retrofit…
Beacon Company is considering automating its production facility. The initial investment in automation would be $8.49 million, and the equipment has a useful life of 7 years with a residual value of $1,140,000. The company will use straight- line depreciation. Beacon could expect a production increase of 34,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Sales revenue Variable costs Direct materials Direct labor Variable manufacturing overhead Total variable manufacturing costs Contribution margin Fixed manufacturing costs Net operating income PA11-2 Part 5 Current (no automation) 86,000 Proposed (automation) 120,000 units units Net present value Per Unit $93 $19 20 8 47 $.46 Total $? > 1,100,000 2 Per Unit $93 $19 ? 8 ? $ 50 Total $? 2,230,000 2 Required: 5. Recalculate the NPV using a 9 percent discount rate. (Euture Value of $1. Present Value of $1. Euture Value Annuity of $1. Present Value Annuity of $1) Note: Use appropriate…
You are evaluating a product for your company. You estimate the sales price of the product to be $200 per unit and sales volume to be 2,000 units in year 1; 5,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $75 per unit and fixed costs are $200,000 per year. The project requires an initial investment of $360,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $40,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 13 percent. What will the year 2 free cash flow for this project be? Multiple Choice $170,412 $192,500 $201,300 $520,950
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Acme Inc. has invested $50,000 in a new assembly line. Products produced by the new assembly line are sold for $100 per unit. Fixed annual costs are $10,000 while variable annual costs are $10 per unit. The assembly line will remain in operation for 10 years, after which it will be sold for $15,000. The company has a MARR of 15%. What is the minimum annual production volume required to generate a profit?

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