Question

In: Accounting

Van Doren Corporation is considering producing a new temperature regulator called Digidial. Marketing data indicate that...

Van Doren Corporation is considering producing a new temperature regulator called Digidial. Marketing data indicate that the company will be able to sell 10,000 units per year at $1,500.The product will be produced in a section of an existing factory that is currently not in use. To produce Digidial, Van Doren must buy a machine that costs $1,000,000. The machine has an expected life of 10 years and will have an ending residual value of $30,000. Van Doren will depreciate the machine over ten years using the straight-line method for both tax and financial reporting purposes. In addition to the cost of the machine, the company will incur incremental manufacturing costs of $370,000 for component parts, $500,000 for direct labor, and $200,000 of miscellaneous costs. Van Doren has a tax rate of 20 percent, and the company’s required rate of return is 15 percent.

A. Compute the Net Present Value of this project.

Solutions

Expert Solution

Calculation of Net Present Value
Sl. No. Particulars Basis Years 1-10
A Sales (10,000 units*$1,500) $ 15,000,000.00
B Less: Costs
a)Depreciation ($1,000,000-$30,000)/10 years $        (97,000.00)
b)Manufacturing Costs Given $      (370,000.00)
c)Direct Labor Given $      (500,000.00)
d)Miscellaneous Costs Given $      (200,000.00)
C Net Profit (A-B) $ 13,833,000.00
D Less: Tax at 20% ($13,833,000*20%) $ (2,766,600.00)
E Profit After Tax (C-D) $ 11,066,400.00
F Add: Non Cash Expenses
a)Depreciation Refer B(a) $          97,000.00
G Net Cash Inflow (F+G) $ 11,163,400.00
Year Cash Flows Annuity PVF @15% Present Value
1-10 years $ 11,163,400.00 5.0188 $       56,026,521.68
(1-((1+0.15)^(-10)))/0.15
Year 10 $          30,000.00 0.2472 $                  7,415.54
(1/(1.15^10))
Present Value of Cash Inflows (a) $       56,033,937.22
Less: Present Value of Cash Outflow (b) $       (1,000,000.00)
Net Present Value (a-b) $       55,033,937.22

Related Solutions

A firm is considering producing a new product.Prior to producing,the firm can conduct a marketing campaign...
A firm is considering producing a new product.Prior to producing,the firm can conduct a marketing campaign (e.g., advertise heavily) or not. Suppose that a marketing campaign costs $1 million. Suppose that if the product is marketed and produced, it will generate revenues of $8 million while costing $2 million to produce; so profit will be $5 million (= $(8 − 2 − 1) million) . If the product is marketed, but not produced, it will generate no revenue and no...
A company is considering two alternative methods of producing a new product. The relevant data concerning...
A company is considering two alternative methods of producing a new product. The relevant data concerning the alternatives appear below: Alternative Alternative I II Initial investment $64,000 $120,000 Annual receipts $50,000 $60,000 Annual disbursements $20,000 $12,000 Annual depreciation $16,000 $20,000 Expected life 4 yrs 6 yrs Salvage value 0 0 At the end of the useful life of whatever equipment is chosen the product will be discontinued. The company's tax rate is 50 percent and the discount rate is 10...
A company is considering two alternative methods of producing a new product. The relevant data concerning...
A company is considering two alternative methods of producing a new product. The relevant data concerning the alternative are presented below. Alternative 1 Alternative 2 Initial investment $64,000 $120,000 Annual Receipts $50,000 $60,000 Annual Disbursements $20,000 $12,000 Annual Depreciation $16,000 $20,000 Expected Life 4 years 6 years Salvage Value 0 0 At the end of the useful life of whatever equipment is chosen the product will discontinue. The company's tax rate is 50% and its cost of capital is 10%....
Considering a new chain of shoe stores. The marketing department of the corporation would like to...
Considering a new chain of shoe stores. The marketing department of the corporation would like to know the customers and their preferences. What questions would you ask before developing an IS for data collection and analysis? Please list five questions.
The Canton Sundae Corporation is considering the replacement of an existing machine. The new machine, called...
The Canton Sundae Corporation is considering the replacement of an existing machine. The new machine, called an X-tender, would provide better sundaes, but it costs $120,000. The X-tender requires $20,000 in additional net working capital, which will be recouped at the end of the project. The machine’s useful life is 10 years, after which it can be sold for a salvage value of $40,000. Straight-line depreciation will be used and the machine will be depreciated to zero over the 10-year...
The Canton Sundae Corporation is considering the replacement of an existing machine. The new machine, called...
The Canton Sundae Corporation is considering the replacement of an existing machine. The new machine, called an X-tender, would provide better sundaes, but it costs $120,000. The X-tender requires $20,000 in additional net working capital, which will be recouped at the end of the project. The machine’s useful life is 10 years, after which it can be sold for a salvage value of $40,000. Straight-line depreciation will be used and the machine will be depreciated to zero over the 10-year...
Rate-study data In a study conducted at the same temperature, the following data for reaction producing...
Rate-study data In a study conducted at the same temperature, the following data for reaction producing nitrosyl bromide were collected. Trial Initial [NO] (M) Initial [Br2] (M) Initial rate (M/s) 1 0.150 0.240 48 2 0.300 0.240 191 3 0.300 0.480 383 Part C What is the rate of the reaction when the initial concentration of NO is 0.400 M and that of Br2 is 0.235 M ? Express your answer to three significant figures and include the appropriate units.
You are called by Hope van Dyne to determine whether a new Pym technology for miniaturized...
You are called by Hope van Dyne to determine whether a new Pym technology for miniaturized food delivery is economically desirable. This project will require $35,000,000 in equipment to infuse food with modified Pym particles. Installing and calibrating the equipment to begin operations will cost an additional $2,500,000. This equipment is categorized as seven-years MACRS property. The project will bring a revenue of $28,000,000 in the first year. After that, the revenue will grow 10% every year as more people...
"A company is considering entering into a new marketing campaign. If it engages in this marketing...
"A company is considering entering into a new marketing campaign. If it engages in this marketing campaign, it must pay $10,000 immediately and $8,000 each at the end of year 1 and year 2. The company believes its annual revenues due to the marketing campaign will be $12,000 at the end of year 1, $10,000 at the end of year 2, and $7,000 at the end of year 3. What is the annual equivalent worth of this marketing campaign over...
The marketing manager of a company producing a new cereal aimed for children wants to examine...
The marketing manager of a company producing a new cereal aimed for children wants to examine the effect of the color and shape of the box's logo on the approval rating of the cereal. He combined 3 colors and 2 shapes to produce a total of 6 designs. Each logo was presented to 3 different groups (a total of 18 groups) and the approval rating for each was recorded and is shown below. The manager analyzed these data using the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT