Question
In: Accounting
Winthrop Company has an opportunity to manufacture and sell a new product for a five-year period....
Winthrop Company has an opportunity to manufacture and sell a new product for a five-year period. To pursue this opportunity, the company would need to purchase a piece of equipment for $125,000. The equipment would have a useful life of five years and zero salvage value. It would be depreciated for financial reporting and tax purposes using the straight-line method. After careful study, Winthrop estimated the following annual costs and revenues for the new product:
| Annual revenues and costs: | |||
| Sales revenues | $ | 320,000 | |
| Variable expenses | $ | 180,000 | |
| Fixed out-of-pocket operating costs | $ | 82,000 | |
The company’s tax rate is 30% and its after-tax cost of capital is 16%.
Calculate the net present value of this investment opportunity.
Solutions
ekkarill92 answered 6 months agoRelated Solutions
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 14%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of
equipment needed
$
140,000
Working
capital needed
$
62,000
Overhaul of
the equipment in two years
$
9,000
Salvage
value of the equipment in four years
$
13,000
Annual
revenues and costs:
Sales
revenues
$
270,000
Variable
expenses
$
130,000
Fixed...
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 18%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
160,000
Working capital needed
$
66,000
Overhaul of the equipment in year two
$
11,000
Salvage value of the equipment in four years
$
15,000
Annual revenues and costs:
Sales revenues
$
310,000
Variable expenses
$
150,000
Fixed out-of-pocket...
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 18%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
160,000
Working capital needed
$
66,000
Overhaul of the equipment in year two
$
11,000
Salvage value of the equipment in four years
$
15,000
Annual revenues and costs:
Sales revenues
$
310,000
Variable expenses
$
150,000
Fixed out-of-pocket...
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 18%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
265,000
Working capital needed
$
88,000
Overhaul of the equipment in year two
$
8,000
Salvage value of the equipment in four years
$
14,000
Annual revenues and costs:
Sales revenues
$
440,000
Variable expenses
$
215,000
Fixed out-of-pocket...
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 15%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost
of equipment needed
$
145,000
Working capital needed
$
63,000
Overhaul of the equipment in two years
$
9,500
Salvage value of the equipment in four years
$
13,500
Annual revenues and costs:
Sales revenues
$
280,000
Variable expenses
$
135,000
Fixed out-of-pocket...
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an
opportunity to manufacture and sell a new product for a four-year
period. The company’s discount rate is 17%. After careful study,
Oakmont estimated the following costs and revenues for the new
product:
Cost of equipment needed
$
190,000
Working capital needed
$
69,000
Overhaul of the equipment in two years
$
6,000
Salvage value of the equipment in four years
$
16,500
Annual revenues and costs:
Sales revenues
$
340,000
Variable expenses
$
165,000
Fixed...
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 17%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
165,000
Working capital needed
$
67,000
Overhaul of the equipment in year two
$
10,000
Salvage value of the equipment in four years
$
13,000
Annual revenues and costs:
Sales revenues
$
320,000
Variable expenses
$
155,000
Fixed out-of-pocket...
Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one...
Lou Barlow, a divisional manager for Sage Company, has an
opportunity to manufacture and sell one of two new products for a
five-year period. His annual pay raises are determined by his
division’s return on investment (ROI), which has exceeded 23% each
of the last three years. He has computed the cost and revenue
estimates for each product as follows: Product A Product B Initial
investment: Cost of equipment (zero salvage value) $ 390,000 $
585,000 Annual revenues and costs:...
Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one...
Lou Barlow, a divisional manager for Sage Company, has an
opportunity to manufacture and sell one of two new products for a
five-year period. His annual pay raises are determined by his
division’s return on investment (ROI), which has exceeded 25% each
of the last three years. He has computed the cost and revenue
estimates for each product as follows: Product A Product B Initial
investment: Cost of equipment (zero salvage value) $ 370,000 $
530,000 Annual revenues and costs:...
Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one...
Lou Barlow, a divisional manager for Sage Company, has an
opportunity to manufacture and sell one of two new products for a
five-year period. His annual pay raises are determined by his
division’s return on investment (ROI), which has exceeded 21% each
of the last three years. He has computed the cost and revenue
estimates for each product as follows:
Product A
Product B
Initial investment:
Cost of equipment (zero salvage value)
$
210,000
$
420,000
Annual revenues and costs:...
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