An equipment hire shop will cost $1,200,000 to open. Assuming annual sales of $1 million, variable...

An equipment hire shop will cost $1,200,000 to open. Assuming annual sales of $1 million, variable costs of 35%, fixed costs of $300,000, depreciation of $100,000, and a tax rate of 28%, calculate the NPV of the project over a 10-year horizon with a 12% cost of capital (assume there is no inflation or salvage value). Conduct a sensitivity analysis by allowing first sales, then variable costs, and finally fixed costs to vary by ±10% from their original estimates. Show which variable appears to affect profitability the most and how this might affect your investment decision?

Expert Solution

jeff jeffy answered 2 years ago

A video rental store will cost $640,000 to open. Assuming annual sales of $1 million, variable...

A video rental store will cost $640,000 to open. Assuming annual sales of $1 million, variable costs of 35%, fixed costs of $300,000, depreciation of $100,000, and a tax rate of 35%, calculate the NPV of the project over a 10-year horizon (no inflation or salvage value assumed) with a 12% cost of capital. Conduct a sensitivity analysis by allowing investment, sales, variable costs, and fixed costs to vary by plus/minus 10% from their original estimates. Which variable appears to...

A store will cost $875,000 to open. Variable costs will be 51% of sales and fixed...

A store will cost $875,000 to open. Variable costs will be 51% of sales and fixed costs are $210,000 per year. The investment costs will be depreciated straight-line over the 9 year life of the store to a salvage value of zero. The opportunity cost of capital is 8% and the tax rate is 40%. sales revenue is $700,000 per year. Using an operating cash flow of 118,688.89, calculate the Net Present Value. = -133574.24 Find the net present value...

The Orange Company purchased equipment on June 1, 2020. Assuming the cost of the equipment is...

The Orange Company purchased equipment on June 1, 2020. Assuming the cost of the equipment is $70,000, the residual value is $6,000, a useful life of 4 years and the use of the diminishing balance method using 2 times the straight line rate. The company's year end is December 31. Round all answers to the nearest dollar. 1) What is depreciation expense for the year ended December 31, 2020? $ Answer 2) What is the depreciation rate (%)? Answer %...

A firm with annual sales of $60 million pays out 50% of its sales as cost...

A firm with annual sales of $60 million pays out 50% of its sales as cost of goods sold. Overhead amounts to $10 million. Labour and salaries are $14 million. Thus, a profit of $6 million is realised. Assets are $20 million, of which 20% are in inventories. a) If the firm can (1) increase sales volume, (2) raise price, (3) reduce labour and salaries, (4) decrease overhead, or (5) reduce the costs of goods sold, how much change (in...

1. The following is Ark Corporation's contribution format income statement for last month: Sales $1,200,000 Variable...

1. The following is Ark Corporation's contribution format income statement for last month: Sales $1,200,000 Variable expenses 800,000 Contribution margin 400,000 Fixed expenses 300,000 Net operating income $ 100,000 The company has no beginning or ending inventories and produced and sold 25,000 units during the month. Required: a. What is the company's contribution margin ratio? b. What is the company's break-even in units? c. If sales increase by 100 units, by how much should net operating income increase? d. How many...

Qing Company traded equipment with a cost of $2,200,000 and a book value of $1,200,000 and...

Qing Company traded equipment with a cost of $2,200,000 and a book value of $1,200,000 and gave $1,000,000 cash for a piece of equipment from BGI Company. The old machine had a fair value of $2,000,000. The two pieces of equipment have similar functions and are not expected to change the two firms’ future cash flows. Which of the following journal entries would Qing make to record the exchange?

The Brown Company purchased equipment on June 1, 2020. Assuming the cost of the equipment is $70,000,...

The Brown Company purchased equipment on June 1, 2020. Assuming the cost of the equipment is $70,000, the residual value is $6,000, a useful life of 4 years and the use of the diminishing balance method using 2 times the straight line rate. The company's year end is December 31. Round all answers to the nearest dollar. 1) What is depreciation expense for the year ended December 31, 2020? $ Answer 2) What is the depreciation rate (%)? Answer % 3) What...

The Orange Company purchased equipment on June 1, 2020. Assuming the cost of the equipment is $70,000,...

The Orange Company purchased equipment on June 1, 2020. Assuming the cost of the equipment is $70,000, the residual value is $6,000, a useful life of 4 years and the use of the diminishing balance method using 2 times the straight line rate. The company's year end is December 31. Round all answers to the nearest dollar. 1) What is depreciation expense for the year ended December 31, 2020? 2) What is the depreciation rate (%)? 3) What is accumulated depreciation...

The Red Company purchased equipment on June 1, 2020. Assuming the cost of the equipment is $66,000,...

The Red Company purchased equipment on June 1, 2020. Assuming the cost of the equipment is $66,000, the residual value is $6,000, a useful life of 5 years and the use of the straight line method. The company's year end is December 31. 1) What is depreciation expense at December 31, 2020? $ Answer 2) What is accumulated depreciation at December 31, 2022? $ Answer 3) What is the carrying value of the asset at December 31, 2023? $ Answer 4)...

1. Assuming that direct labor is a variable cost, product costs under variable costing include only:...

1. Assuming that direct labor is a variable cost, product costs under variable costing include only: Select one: a. direct materials, direct labor, variable manufacturing overhead, and variable selling and administrative expenses. b. direct materials and direct labor. 3. Which of the following statements is true? I. Expenses are not usually separated into variable and fixed elements in externally reported income statements. II. Even if there is no change in units sold, selling price, or cost structure, a company can...

Question