Question

In: Finance

Spider Lamp is considering the manufacture of a new lamp. Equipment necessary for production will cost...

Spider Lamp is considering the manufacture of a new lamp. Equipment necessary for production will cost $9 million and be depreciated on a straight-line basis over the eight-year life of the product to $1 millions salvage value. The lamp will retail for $110. The company expects to sell 100,000 lamps per year. Fixed costs will be $2,000,000 per year and variable costs are $45 per lamp. Production will require an investment in net working capital of $500,000. The tax rate is 40 percent Perform a scenario analysis using 10 percent, 20 percent, and 30 percent cost of capital. Calculate IRR and NPV for each case.

Solutions

Expert Solution

Calculation of Cash Flows of the Project
Particulars 0 1 2 3 4 5 6 7 8
Initial Investment
Cost of Equipment -9000000
Investment in net working capital -500000
Net Investment (A) -9500000
Operating Cash Flows
Sales Units (B) 100000 100000 100000 100000 100000 100000 100000 100000
Annual Sales (C = B*$110) 11000000 11000000 11000000 11000000 11000000 11000000 11000000 11000000
Variable Costs (D = B*$45) 4500000 4500000 4500000 4500000 4500000 4500000 4500000 4500000
Fixed Costs (E ) 2000000 2000000 2000000 2000000 2000000 2000000 2000000 2000000
Depreciation (F)
($9 million - $1 million) / 8 years		 1000000 1000000 1000000 1000000 1000000 1000000 1000000 1000000
Profit Before Tax (G = C-D-E-F) 3500000 3500000 3500000 3500000 3500000 3500000 3500000 3500000
Tax @40% (H = G*40%) 1400000 1400000 1400000 1400000 1400000 1400000 1400000 1400000
Profit After Tax (I = G-H) 2100000 2100000 2100000 2100000 2100000 2100000 2100000 2100000
Add back Depreciation (J = F) 1000000 1000000 1000000 1000000 1000000 1000000 1000000 1000000
Net Operating Cash Flows (K = I+J) 3100000 3100000 3100000 3100000 3100000 3100000 3100000 3100000
Terminal Value
Salvage Value (L) 1000000
Tax on sale (M = L*40%) 400000
After tax salvage Value (N = L-M) 600000
Recovery of Working Capital (O) 500000
Net Terminal Value (P = N+O) 1100000
Total Cash Flows (Q = A+K+P) -9500000 3100000 3100000 3100000 3100000 3100000 3100000 3100000 4200000

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Nona Sports is considering the purchase of new production equipment. The equipment will cost $135,000. It...
Nona Sports is considering the purchase of new production equipment. The equipment will cost $135,000. It has an expected useful of life of 5 years, but will require refurbishing at the end of 3 years. The refurbishment will cost $5,000. The estimated salvage value at the end of the useful life is $10,000. The increased annual net income from the equipment is projected to be $40,000. Using a hurdle rate of 12%, calculate the NPV for the equipment. *If you...
Delia Landscaping is considering a new 4-year project. The equipment necessary would cost $173,000 and be...
Delia Landscaping is considering a new 4-year project. The equipment necessary would cost $173,000 and be depreciated on a 3-year MACRS to a book value of zero. The MACRS percentages each year are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. At the end of the project, the equipment can be sold for 10 percent of its initial cost. The project will have annual sales of $110,000, variable costs of $27,700, and fixed costs of $12,300. The project...
The Bright Lamp Company has budgeted its conversion cost for the small lamp production as $85,000...
The Bright Lamp Company has budgeted its conversion cost for the small lamp production as $85,000 for 1,300 production hours. Each unit produced by the cell requires 15 minutes of process time. During the month, 3,800 units are manufactured in the cell. The estimated material cost is $18 per unit. Provide the following journal entries. In your computations, round per unit cost to two decimal places and use rounded amount in subsequent calculations. If required, round your final answers to...
Burnaby Ltd. is considering the acquisition of new production equipment. If purchased, the new equipment would...
Burnaby Ltd. is considering the acquisition of new production equipment. If purchased, the new equipment would cost $1,850,000. Installation and testing costs would be $35,000 and $25,000 respectively. Once operational, the equipment will cause an increase in working capital of $120,000. The new equipment is expected to generate increased annual sales of $720,000. Variable costs to operate the machine are estimated at 42% of sales and annual fixed costs would be lowered by $75,000. The equipmenthasanestimate6yearlifeandasalvagevalueof$90,000. Thecompanyrequiresan11% return on its...
Atlantis Manufacturing Corp. is considering a new line of office furniture. New equipment required to manufacture...
Atlantis Manufacturing Corp. is considering a new line of office furniture. New equipment required to manufacture the product cost $750.000 to purchase and an additional $50,000 in shipping and installation expenses. The equipment will be housed in space currently unused by the company and will be depreciated on a MACRS four-year schedule over the project's four-year economic life, with rates of 33 percent 45 percent 15 percent and 7 percent for Years 1 through 4. The equipment's expected salvage value...
A company is considering the purchase of new equipment for its production area. The equipment has...
A company is considering the purchase of new equipment for its production area. The equipment has an initial cost of $ 3,000 with operation and maintenance costs, as well as the market liquidation value as shown in the following table: Year Costs of operation Rescue value 1 $1,000 $1,500 2 $1,700 $1,000 3 $2,400 $500 4 $3,100 $0 Determine the Optimal Economic Life of this investment, if the MARR of the company is 12%
A company is evaluating a new 4-year project. The equipment necessary for the project will cost...
A company is evaluating a new 4-year project. The equipment necessary for the project will cost $3,600,000 and can be sold for $725,000 at the end of the project. The asset is in the 5-year MACRS class. The depreciation percentage each year is 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company's tax rate is 40 percent. What is the aftertax salvage value of the equipment?
Your company just bought a new piece of equipment to manufacture widgets. It has a cost...
Your company just bought a new piece of equipment to manufacture widgets. It has a cost basis of​ $275,000, a useful life of 13​ years, and no salvage value. If the asset is depreciated using a​ 150% declining balance with straight line switchover​ method, answer the following​ questions: ​a) How much does the value depreciate in Year​ 1? ​b) How much does the value depreciate in Year​ 2? ​c) What is the book value at the end of Year​ 4?...
Your company just bought a new piece of equipment to manufacture widgets. It has a cost...
Your company just bought a new piece of equipment to manufacture widgets. It has a cost basis of​ $33,000, a useful life of 13​ years, and no salvage value. If the asset is depreciated using a​ 200% declining balance with straight line switchover​ method, answer the following​ questions: ​a) How much does the value depreciate in Year​ 1? ​b) How much does the value depreciate in Year​ 2? ​c) What is the book value at the end of Year​ 4?...
ben is considering the purchase of new piece of equipment. the cost savings from the equipment...
ben is considering the purchase of new piece of equipment. the cost savings from the equipment would result in an annual increase in net income of $200000. the equipment will have an initial cost of $1200000 and have an 8 year life. the salvage value of the equipment is estimated to be $200000. the hurdle rate is 10%. what is accounting rate of return? b) what is the payback period? c) what is the net present value? d) what would...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT