Question

In: Finance

Rex inc currently has one product, low-priced stoves. Rex Inc has decied to sell a new...

Rex inc currently has one product, low-priced stoves. Rex Inc has decied to sell a new line of medium-priced stoves. Sales for the new line of stoves are estimated at 6 million a year. Variable costs are 70% of sales.The project is expected to last 10 years. In addition to the production variable costs, the fixed costs each year will be 1,000,000. The company has spent $1,000,000 in research and a marketing study that determined the company will lose 800,000 in sales a year of its existing low-priced stoves.The production variable cost of the existing low-priced stoves is 500,000 a year. The plant and equipment required for producing the new line of stoves costs 2,000,000 and will be depreciated down to zero over 20 years using straight line depreciation. It is expected that the plant and equipment can be sold (market or scrap value) for $500,000 at the end of 10 years. The new stoves will also require today an increase in net working capital of $400,000 that will be returned at the end of the project. The tax rate is 25 percent and the cost of capital is 10%.

7 part question

What is the initial outlay for this project?

What is the annual EBITDA for this project?

What is the annual taxable income for this project?

What is the annual net income for this project?

What is the operating Cashflow for this project?

What is the remaining book value for the plant at equipment at the end of the project?

What is the termination value for this project?

Solutions

Expert Solution

1) Cost of plant and equipment $ 20,00,000
Increase in NWC $    4,00,000
Initial outlay for the project $ 24,00,000
2) Sales for the new line of stoves $ 60,00,000
Variable costs [70%] $ 42,00,000
Fixed costs $ 10,00,000
EBITDA for the new stove $    8,00,000
Loss of EBITDA on existing stoves [800000-500000] $    3,00,000
EBITDA for the project $    5,00,000
3) EBITDA for the project $    5,00,000
Less: Depreciation [2000000/20] $    1,00,000
Annual taxable income for the project $    4,00,000
4) Less: Tax at 25% $    1,00,000
Annual net income $    3,00,000
5) Add: Depreciation $    1,00,000
Annual operating cash flow for the project $    4,00,000
6) Remaining book value = 2000000-1000000 = $ 10,00,000
7) Salvage value of the plant $    5,00,000
Loss on sale $    5,00,000
Tax shield on loss at 25% $    1,25,000
After tax salvage value = 500000+125000 = $    6,25,000
Add: Recapture of NWC $    4,00,000
Termination value for the project $ 10,25,000

Related Solutions

RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new...
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $20 million a year. Variable costs are 80% of sales. The project is expected to last 10 years. Also, non-variable costs are $2,000,000 per year. The company has spent $3,000,000 in research and a marketing study that determined the company will lose (cannibalization) $4 million in sales a year...
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new...
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $50 million a year. Variable costs are 60% of sales. The project is expected to last 10 years. Also, non-variable costs are $10,000,000 per year. The company has spent $4,000,000 in research and a marketing study that determined the company will lose (cannibalization) $10 million in sales a year...
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new...
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $30 million a year. Variable costs are 75% of sales. The project is expected to last 10 years. Also, non-variable costs are $4,000,000 per year. The company has spent $1,000,000 in research and a marketing study that determined the company will lose (cannibalization) $10 million in sales a year...
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new...
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $30 million a year. Variable costs are 75% of sales. The project is expected to last 10 years. Also, non-variable costs are $4,000,000 per year. The company has spent $1,000,000 in research and a marketing study that determined the company will lose (cannibalization) $10 million in sales a year...
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new...
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $20 million a year. Variable costs are 80% of sales. The project is expected to last 10 years. Also, non-variable costs are $2,000,000 per year. The company has spent $3,000,000 in research and a marketing study that determined the company will lose (cannibalization) $4 million in sales a year...
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $50 million a year.
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $50 million a year. Variable costs are 60% of sales. The project is expected to last 10 years. Also, non-variable costs are $10,000,000 per year. The company has spent $4,000,000 in research and a marketing study that determined the company will lose (cannibalization) $10 million in sales a year...
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $20 million a year.
  RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $20 million a year. Variable costs are 80% of sales. The project is expected to last 10 years. Also, non-variable costs are $2,000,000 per year. The company has spent $3,000,000 in research and a marketing study that determined the company will lose (cannibalization) $4 million in sales a...
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $30 million a year.
RET Inc. currently has one product, low-priced stoves. RET Inc. has decided to sell a new line of medium-priced stoves. Sales revenues for the new line of stoves are estimated at $30 million a year. Variable costs are 75% of sales. The project is expected to last 10 years. Also, non-variable costs are $4,000,000 per year. The company has spent $1,000,000 in research and a marketing study that determined the company will lose (cannibalization) $10 million in sales a year...
RET Inc. currently has two products, low and high priced stoves. REX Inc. has decided to...
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. The project is expected to last 10 years. Also, non-variable costs are $200 per year. The company has spent $100 in research and a marketing study that determined the company will have synergy gains/sales of $200 a...
AAA Corp. currently has one​ product, high-priced lawn mowers. AAA Corp. has decided to sell a...
AAA Corp. currently has one​ product, high-priced lawn mowers. AAA Corp. has decided to sell a new line of​ medium-priced lawn mowers. The building and machinery for producing this new line is estimated to cost ​$10,000,000 and it will be depreciated down to zero over 20 years using​ straight-line depreciation.​ Also, an investment today on working capital in the amount of ​$4,000,000 is needed. The working capital will be recovered at the end of the project. Sales for the new...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT