Question
In: Finance
A college friend of mine just filed for a patent for a new product – the...
A college friend of mine just filed for a patent for a new product – the “bowling buddy” bowlers’ training aid. The bowling buddy sells for $55 and the variable cost per unit is $26. They rent production space for $25,000 annually. The initial investment is $250,000 and the project life is 5 years. Assume appropriate discount rate is 10% and ignore taxes. Assuming my friend can sell 4,000 bowling buddies per year, what is the IRR of the project?
B) Assuming my friend can sell 3,000 bowling buddies per year, what is the discounted payback period of the project?
Solutions
Expert Solution
Part A:
| Calculation of annual operating cash flow | ||||||
| Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | ||
| No of units | 4,000 | 4,000 | 4,000 | 4,000 | 4,000 | |
| Selling price | $ 55 | $ 55 | $ 55 | $ 55 | $ 55 | |
| Operating cost | $ 26 | $ 26 | $ 26 | $ 26 | $ 26 | |
| Sale | $ 220,000 | $ 220,000 | $ 220,000 | $ 220,000 | $ 220,000 | |
| Less: Operating Cost | $ 104,000 | $ 104,000 | $ 104,000 | $ 104,000 | $ 104,000 | |
| Contribution | $ 116,000 | $ 116,000 | $ 116,000 | $ 116,000 | $ 116,000 | |
| Less: Marketting cost | $ 25,000 | $ 25,000 | $ 25,000 | $ 25,000 | $ 25,000 | |
| Cash flow | $ 91,000 | $ 91,000 | $ 91,000 | $ 91,000 | $ 91,000 | |
| Calculation of IRR | ||||||
| 23.00% | 24.00% | |||||
| Year | Total cash flow | PV factor @ 23% | Present values | PV factor @ 24% | Present values | |
| 0 | $ (250,000) | 1.000 | $ (250,000) | 1.000 | $ (250,000) | |
| 1 | $ 91,000 | 0.813 | $ 73,984 | 0.806 | $ 73,387 | |
| 2 | $ 91,000 | 0.661 | $ 60,149 | 0.650 | $ 59,183 | |
| 3 | $ 91,000 | 0.537 | $ 48,902 | 0.524 | $ 47,728 | |
| 4 | $ 91,000 | 0.437 | $ 39,758 | 0.423 | $ 38,491 | |
| 5 | $ 91,000 | 0.355 | $ 32,323 | 0.341 | $ 31,041 | |
| $ 5,116 | $ (170) | |||||
| IRR | =Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV) | |||||
| IRR | '=23%+ (24%-23%)*(5116.04/(5116.04-(-170.01) | |||||
| 23.97% |
Part B:
| Calculation of annual operating cash flow | ||||||||
| Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | ||||
| No of units | 3,000 | 3,000 | 3,000 | 3,000 | 3,000 | |||
| Selling price | $ 55 | $ 55 | $ 55 | $ 55 | $ 55 | |||
| Operating cost | $ 26 | $ 26 | $ 26 | $ 26 | $ 26 | |||
| Sale | $ 165,000 | $ 165,000 | $ 165,000 | $ 165,000 | $ 165,000 | |||
| Less: Operating Cost | $ 78,000 | $ 78,000 | $ 78,000 | $ 78,000 | $ 78,000 | |||
| Contribution | $ 87,000 | $ 87,000 | $ 87,000 | $ 87,000 | $ 87,000 | |||
| Less: Marketting cost | $ 25,000 | $ 25,000 | $ 25,000 | $ 25,000 | $ 25,000 | |||
| Cash flow | $ 62,000 | $ 62,000 | $ 62,000 | $ 62,000 | $ 62,000 | |||
| Calculation of Discounted payback period | ||||||||
| Year | Annual Cash flow | PV factor @ 10% | Present values | Cumulative PV | ||||
| 0 | $ (250,000) | 1.000 | $ (250,000) | $ (250,000) | ||||
| 1 | $ 91,000 | 0.909 | $ 82,727 | $ (167,273) | ||||
| 2 | $ 91,000 | 0.826 | $ 75,207 | $ (92,066) | ||||
| 3 | $ 91,000 | 0.751 | $ 68,370 | $ (23,696) | ||||
| 4 | $ 91,000 | 0.683 | $ 62,154 | $ 38,458 | ||||
| 5 | $ 91,000 | 0.621 | $ 56,504 | $ 94,962 | ||||
 jeff jeffy answered 1 year agoRelated SolutionsA college friend of mine just filed for a patent for a new product – the...A college friend of mine just filed for a patent for a new
product – the “bowling buddy” bowlers’ training aid (Google it
after the exam). The bowling buddy sells for $55 and the variable
cost per unit is $26. They rent production space for $25,000
annually. The initial investment is $250,000 and the project life
is 5 years. Assume appropriate discount rate is 10% and ignore
taxes. Assuming my friend can sell 3,000 bowling buddies per year,
what is...
The company you co-own filed a utility patent application several years ago for a new product.Patent LawThe company you co-own filed a utility patent application
several years ago for a new product. The patent application
contains an independent claim and four dependent claims each
describing various features of the components in the independent
Claim 1. Claim 2 depends on Claim 1, Claim 3
depends on Claim 2, Claim 4 depends on Claim 3, and Claim 5 depends
on Claim 1. In the Office Action the examiner rejects Claims 1, 3,
and 4, but allows Claims...
A drug company has a monopoly on a new patent medicine. The product can be made...A drug company has a monopoly on a new patent medicine. The
product can be made in either of two plants. The costs of
production for the two plants are MC1 = 20 + 2Q1, and MC2 = 10 +
5Q2. The firm's estimate of the demand for the product is P = 20 –
3 (Q1 + Q2). How much should the firm plan to produce in each
plant? At what price should it plan to sell the product?
A friend of mine believes that the average GPA at KSU is equal to 3.0. In...A friend of mine believes that the average GPA at KSU is equal
to 3.0. In order to test whether he/she is right, I collect some
information from the data. Specifically, I use 100 KSU students to
form a sample and find that their sample average GPA is equal to
3.3. In addition, suppose that I also know the population standard
deviation of GPA at KSU is 1.5. I decide to use 0.05 as the level
of significance for my...
Scooby Industries just received a patent on a new cancer treatment. The firm must now decide...Scooby Industries just received a patent on a new cancer
treatment. The firm must now decide if it is worthwhile to start
manufacturing the drug. To do this, the firm must buy new machines
for a total of $860,000, which it will depreciate on a
straight-line basis (to zero) over the next 7 years (Years 1 and 7
are complete years! Do not use the ½ year convention!). Scooby
expects the machine to have no (economic) salvage value in 7...
A friend of yours just bought a new sports car with a $4,500 down payment, and...A friend of yours just bought a new sports car with a $4,500
down payment, and her $32,000 car loan is financed at an interest
rate of 0.50% per month for 36
months. After 2 years, the "Blue Book" value of her vehicle in
the used-car marketplace is $10,000.
a. How much does your friend still owe on the
car loan immediately after she makes her 24th payment?
b. Compare your answer to Part (a) to
$10,000.
This situation is...
Compensation to a customer when overbooking happens is an expense, right? A friend of mine that...Compensation to a customer when overbooking happens is an
expense, right?
A friend of mine that booked a hotel on a site, notified her
that there was an overbooking. The site compensated her by giving
her a 5 start hotel instead. Compensating her by upgrading her
hotel. The site probably paid the amount left that needed to be
paid. In order to compensate my friend, right? This cost would go
into the site's expense cost?
Z Co. filed suit against W Inc. in 2021 seeking damages for patent infringement. At December...Z Co. filed suit against W Inc. in 2021 seeking damages for
patent infringement. At December 31, 2021, legal counsel for Z
believed that it was probable that Z would be successful against W
for an estimated amount in the range of $30 million to $60 million,
with each amount in that range considered equally likely. Z was
awarded $40 million in April 2022. Z should report this award in
its 2021 financial statements, issued in March 2022?
Problem C, Contingencies Z Corp. filed a claim for patent infringement against M Corp. in October...Problem C, Contingencies Z Corp. filed a claim for patent
infringement against M Corp. in October 2020. In preparing its
financial statements for the year ending December 31, 2020, M Corp.
financial accounting group obtained the following information
related to this claim:
• M Corp’s Risk Management Department believes that M will incur
a loss from this lawsuit. They estimate the loss will be in a range
from $15 million to $20 million, but cannot give a more precise
estimate....
Rocky Jackson, a friend of yours, just started a new job. He is attempting to fill...Rocky Jackson, a friend of yours, just started a new job. He is
attempting to fill out Form W-4 and has asked for your help. He
would like to receive a large refund when he files his return and
would, therefore, like to claim as few allowances as possible. Even
though he is married and has four children, he is planning on
claiming no allowances. What would you tell Rocky?
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
ADVERTISEMENT
|