Question
In: Accounting
Englewood Company has an opportunity to produce and sell a revolutionary new smoke detector for homes....
Englewood Company has an opportunity to produce and sell a revolutionary new smoke detector for homes. To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential:
New equipment would have to be acquired to produce the smoke detector. The equipment would cost $100,000 and be useable for 12 years. After 12 years, it would have a salvage value equal to 10% of the original cost.
Production and sales of the smoke detector would require a working capital investment of $40,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere after 12 years.
An extensive marketing study projects sales in units over the next 12 years as follows:
Year Sales in Units
1……………. 4,000
2……………. 7,000
3……………. 10,000
4-12………… 12,000
The smoke detectors would sell for $45 each; variable costs for production, administration, and sales would be $25 per unit.
To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows:
Amount of Yearly
Year Advertising
1-2…………. $70,000
3…………… $50,000
4-12……….. $40,000
Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $127,500 per year. (Depreciation is based on cost less salvage value.)
The company’s tax rate and required rate of return is 20%
Required:
- Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from the sale of the smoke detectors for each year over the next 12 years.
- Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment. Would you recommend that Englewood Company accept the smoke detector as a new product?
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ekkarill92 answered 1 year agoRelated Solutions
Englewood Company has an opportunity to produce and sell a revolutionary new smoke detector for homes....
Englewood Company has an opportunity to produce and sell a
revolutionary new smoke detector for homes. To determine whether
this would be a profitable venture, the company has gathered the
following data on probable costs and market potential: New
equipment would have to be acquired to produce the smoke detector.
The equipment would cost $100,000 and be useable for 12 years.
After 12 years, it would have a salvage value equal to 10% of the
original cost. Production and sales...
Englewood Company has an opportunity to produce and sell a revolutionary new smoke detector for homes....
Englewood Company has
an opportunity to produce and sell a revolutionary new smoke
detector for homes. To determine whether this would be a profitable
venture, the company has gathered the following data on probable
costs and market potential:
New equipment would have to be acquired to produce the smoke
detector. The equipment would cost $100,000 and be useable for 12
years. After 12 years, it would have a salvage value equal to 10%
of the original cost.
Production and sales...
ETech Company was organized on January 1, 2017 to produce and sell a revolutionary smart watch....
ETech Company was organized on
January 1, 2017 to produce and sell a revolutionary smart watch. At
the beginning of its second year (2018) finished goods inventory
was 2,000 watches. During 2018 ETech accountant resigned and the
accounting was done by an accounting student who worked part-time
for the company. The income statement below was prepared by the
accounting student.
ETech Company
Income Statement
As of December 31, 2018
Revenues:
Sales revenue (38,000
watches)……………………………….
$1,140,000
Royalty
revenue………………………………………………. ...
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...
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