The Picture-Perfect Company is considering whether it should introduce a new product, a camera lens. However,...

The Picture-Perfect Company is considering whether it should introduce a new product, a camera lens. However, they are unsure of the demand for the product and have hired a consultant to do some market research for them before moving forward. The consultant fee is $10,000. If the company produces the lens, it will have to invest $400,000 in new equipment, and $25,000 in working capital. The equipment will last for the duration of the project, which is 3 years, and will be depreciated to zero using straight-line depreciation. In 3 years, the equipment is expected to have a scrap value of 5,000. The lens is expected to produce $300,000 per year in revenues and create operating costs of $100,000 per year. If the lens is produced, Picture-Perfect expects to lose $25,000 per year from the decline in demand for a lens the company is currently selling. If the company has a tax rate of .21 and the project has a required return of .08, should Picture-Perfect move ahead with the new product?

Solutions

Expert Solution

The consultant fee of $10,000 is a sunk cost and hence irrelevant in capital budgeting.

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The last row highlighted in yellow is NPV. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output.

Since, NPV of the project is positive, Picture-Perfect should move ahead with the new product

jeff jeffy answered 1 week ago

Next > < Previous

Related Solutions

A company is considering three alternative prices for a new product it plans to introduce. the...

A company is considering three alternative prices for a new product it plans to introduce. the estimate of price and quantity demanded are: with a price of $100 per unit the demand will be 50,000 units; with a price of $150 per unit the demand will be 35,000 units; and with a price of $200 per unit the demand will be 20,000 units. Fixed costs are $2,000,000 and variable cost is $50 per unit. What is the profit when the...

The Picture Perfect Camera Shop had the following transactions for the month of August 2019. Aug....

The Picture Perfect Camera Shop had the following transactions for the month of August 2019. Aug. 1 Purchased cameras for $3,700 plus a freight charge of $180 from the Mason Company, Invoice 532, dated July 29, net payable in 60 days. 6 Purchased color film for $485 from Digital Products, Invoice 989, dated August 4, net payable in 30 days. 10 Purchased camera cases for $935 from Raven Leathers, Invoice 668, dated August 8; terms are 2/10, n/30. 15 Returned...

The Spiked Seltzer Company must decide whether or not they should introduce a new flavored spiked...

The Spiked Seltzer Company must decide whether or not they should introduce a new flavored spiked drink. The owner predicts that if it does introduce the new flavor it will earn a profit of $1 million if sales are around 100 million units, a profit of $200,000 if sales are around 50 million units, or it will lose $2 million if sales are only around 1 million units. If Spiked Seltzer Company does not invest in marketing the new flavor,...

A kitchen appliance manufacturer is deciding whether or not to introduce a new product. Management has...

A kitchen appliance manufacturer is deciding whether or not to introduce a new product. Management has identified three possible demand regimes, with associated projected income for the first year of operation. In addition, if the company decides to produce the new product, it can do so by using its existing facilities, which will cost it $3,500,000 in renovations; or build a new facility, which will cost $6,500,000. Expanding will allow it to make more product and so its potential sales...

58. Kroft Food Products is attempting to decide whether it should introduce a new line of...

58. Kroft Food Products is attempting to decide whether it should introduce a new line of salad dressings called Special Choices. The company can test market the salad dressings in selected geographic areas or bypass the test market and introduce the product nationally. The cost of the test market is $150,000. If the company conducts the test market, it must wait to see the results before deciding whether to introduce the salad dressings nationally. The probability of a positive test...

Creative Ideas Company has decided to introduce a new product. The new product can be manufactured...

Creative Ideas Company has decided to introduce a new product. The new product can be manufactured by either a capital-intensive method or a labor-intensive method. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows. Capital-Intensive Labor-Intensive Direct materials $6 per unit $6.50 per unit Direct labor $7 per unit $9.00 per unit Variable overhead $3 per unit $5.00 per unit Fixed manufacturing costs $2,877,000 $1,767,000 Creative Ideas’...

A manufacturing company is evaluating two options for new equipment to introduce a new product to...

A manufacturing company is evaluating two options for new equipment to introduce a new product to its suite of goods. The details for each option are provided below: Option 1 $65,000 for equipment with useful life of 7 years and no salvage value. Maintenance costs are expected to be $2,700 per year and increase by 3% in Year 6 and remain at that rate. Materials in Year 1 are estimated to be $15,000 but remain constant at $10,000 per year...

A manufacturing company is evaluating two options for new equipment to introduce a new product to...

Why is it dangerous to introduce a new product?

Golden Gate Windsurfing Inc. is considering a project to introduce a new product line and has...

Golden Gate Windsurfing Inc. is considering a project to introduce a new product line and has just received the results of a market research study about this expansion. The project life is expected to be 5 years. The company plans to set up its new operation in its own building site, which was purchased last year at a cost of $800,000. The building site has the current market value of $900,000. The study estimated the sales and expenses as follow:...

Subjects