Question
In: Accounting
The sales and finance team of a car company is evaluating a new proposed luxury model...
The sales and finance team of a car company is evaluating a
new proposed luxury model of its brand that will require an
investment of $1Billion in a new machine for car interior
decoration. Demand for the company’s car is expected to begin at
100,000 units in year 1, with 10% annual growth thereafter.
Production cost will be $35,000 per unit in the first year, and
increase by a rate of either 3% or 5% per year as a result of wage
increase. Selling price will start at $37,000 and increase by 4% of
the production cost. The model will be phased out at the end of
year 10. In addition, 0.3%, 2% and 1.5% of before tax profit per
year will be spent on social corporate responsibility, commercial
(including promotions) and recalls respectively. Assume taxes will
be 30% of yearly profit and that inflation will remain at 0% per
year throughout the 10 year of production. Also assume interest
rate is expected to be 3% per year in the first 5 years and 5% in
the last 5 years.
a. Based on present worth analysis, is the proposed investment
profitable if production cost increases by a rate of 3% per year as
a result of wage increase? Justify your answer.
b. Based on present worth analysis, is the proposed investment
profitable if production cost increases by a rate of 5% per year as
a result of wage increase? Justify your answer
Solutions
ekkarill92 answered 2 years agoRelated Solutions
The sales and finance team of a car company is evaluating a new proposed luxury model...
The sales and finance team of a car company is evaluating a new
proposed luxury model of its
brand that will require an investment of $1Billion in a new machine
for car interior decoration.
Demand for the company’s car is expected to begin at 100,000 units
in year 1, with 10% annual
growth thereafter. Production cost will be $35,000 per unit in the
first year, and increase by a rate
of either 3% or 5% per year as a result...
The sales and finance team of a car company is evaluating a new proposed luxury model...
The sales and finance team of a car company is evaluating a
new proposed luxury model of its brand that will require an
investment of $1Billion in a new machine for car interior
decoration. Demand for the company’s car is expected to begin at
100,000 units in year 1, with 10% annual growth thereafter.
Production cost will be $40,000 per unit in the first year, and
increase by a rateof either 3% or 5% per year as a result of...
Question 3 The sales and finance team of a car company is evaluating a new proposed...
Question 3
The sales and finance team of a car company is evaluating a new
proposed luxury model of its
brand that will require an investment of $1Billion in a new machine
for car interior decoration.
Demand for the company’s car is expected to begin at 100,000 units
in year 1, with 10% annual
growth thereafter. Production cost will be $35,000 per unit in the
first year, and increase by a rate
of either 3% or 5% per year as...
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