Question

In: Accounting

AO sam is discussing a new project amongst their management team. They want to build tankless...

AO sam is discussing a new project amongst their management team. They want to build tankless water heaters. In order to do this, they will need to build a new assembly line that will cost them 1.5 million dollars to build. It costs $45,000 to get all the material shipped to AO sam. They will have to buy $107,000 worth of new inventory since tankless hot water heaters and normal hot water heaters use different parts. Accounts payable will increase by $75,000.

The chief marketing officer (CMO) estimates that they will sell 400 units a year for 5 years at a price of $16,000 each.

Use the data provided for A.O. Sam and their proposed project to answer this question.

What is the NPV of this project?

A.

-$14,000
B.

$1,987,350
C.

$2,033,120
D.

$2,068,572

The chief operations officer (COO) estimates that the variable costs to build these will be 80% of revenue.

The chief financial officer (CFO) says the company will use the MACRS 3 year class for depreciation. He estimates that the assembly line will have salvage value of $100,000. He notes that AO sam's tax rate is 33% and that the normal WACC is 11%.

The CEO notes that they have already extended their manufacturing plant when they thought they’d be building larger water heaters at the plant so they have the room. This extension is already paid for and cost $225,000.

Solutions

Expert Solution

Initial investment
New assembly line $  1,500,000.00 $       1,770,000.00
Shipping $       45,000.00
Increase in working Capital = 107000 + 75000 $     182,000.00
Net Initial Investment $  1,727,000.00
Year 0 1 2 3 4 5
Initial investment $ (1,727,000.00)
Sales = (400 units x $16000) $    6,400,000.00 $    6,400,000.00 $       6,400,000.00 $   6,400,000.00 $  6,400,000.00
Less: Variable cost (80% x 6,400,000) $    5,120,000.00 $    5,120,000.00 $       5,120,000.00 $   5,120,000.00 $  5,120,000.00
Annual contribution margin $    1,280,000.00 $    1,280,000.00 $       1,280,000.00 $   1,280,000.00 $  1,280,000.00
Less: Depreciation (1545000 x MACR Dep.Rate) $       589,941.00 $       786,765.00 $          262,137.00 $      131,157.00
Net operating income $       690,059.00 $       493,235.00 $       1,017,863.00 $   1,148,843.00 $  1,280,000.00
Less: Tax $       227,719.47 $       162,767.55 $          335,894.79 $      379,118.19 $     422,400.00
Net Income $       462,339.53 $       330,467.45 $          681,968.21 $      769,724.81 $     857,600.00
Add: Depreciation $       589,941.00 $       786,765.00 $          262,137.00 $      131,157.00 $                    -   
Salvage Value $                     -    $       67,000.00
Working Capital recovered $     182,000.00
Net Cash Flow $ (1,727,000.00) $    1,052,280.53 $    1,117,232.45 $          944,105.21 $      900,881.81 $  1,106,600.00
Present value @ 11% 1 0.9009 0.8116 0.7312 0.6587 0.5935
Present value $ (1,727,000.00) $       948,000.48 $       906,770.92 $          690,321.59 $      593,438.75 $     656,713.24
NPV $  2,068,244.98
Option D is correct

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

AO sam is discussing a new project amongst their management team. They want to build tankless...
AO sam is discussing a new project amongst their management team. They want to build tankless water heaters. In order to do this, they will need to build a new assembly line that will cost them 1.5 million dollars to build. It costs $45,000 to get all the material shipped to AO sam. They will have to buy $107,000 worth of new inventory since tankless hot water heaters and normal hot water heaters use different parts. Accounts payable will increase...
what is required from the management team when start new project?
what is required from the management team when start new project?
Explain how Design-Bid-Build and Design-Build project delivery methods can differently affect on management of project changes,...
Explain how Design-Bid-Build and Design-Build project delivery methods can differently affect on management of project changes, claims, and disputes (Max 200 words).             
The city of Hamiltown decides to build a new basketball stadium to attract the team from...
The city of Hamiltown decides to build a new basketball stadium to attract the team from Jacksondale (NB: this is almost always a bad decision for cities as extensive research on the local economic effects of sporting events has shown). One economic adviser suggests that the stadium should be financed by a 2 year sales tax of 10%, while another adviser recommends that the stadium be financed by a 20 year sales tax of 1%. Assume the interest rate is...
Jamil Hassan heads a newly formed project management team for a major international corporation. The team...
Jamil Hassan heads a newly formed project management team for a major international corporation. The team is composed of 20 professionals who live and work in Oman, Saudi Arabia, United Kingdom, Australia, Kuwait & Africa. All members of the team report to Jamil. The team is a virtual team now since March of this year due to the COVID-19 pandemic and all are connected primarily via videoconference, group-decision support software, email and telephone. The team has met twice in a...
The project management team lead is evaluating a project proposal from their engineering staff. The staff...
The project management team lead is evaluating a project proposal from their engineering staff. The staff have proposed a capital purchase of a new machine for use. The year zero purchase costs are estimated as $30,000 with an additional (one-time) investment of $8,000 at the end of the second year of operation. Annual operating and maintenance (O&M) costs are estimated as $6,000 per year. Installation of the new machine is expected to provide revenue of $8,000 for the first year,...
Java For this project, we want to build a calculator program that can perform simple calculations...
Java For this project, we want to build a calculator program that can perform simple calculations and provide an output. If it encounters any errors, it should print a helpful error message giving the nature of the error. You may use any combination of If-Then statements and Try-Catch statements to detect and handle errors. Program Specification Input Our program should accept input in one of two ways: If a command-line argument is provided, it should read input from the file...
Why are good people and project management skills essential for team leaders? Why do team leaders...
Why are good people and project management skills essential for team leaders? Why do team leaders need to encourage diversity, inclusion and collaboration within their teams? What is the difference between ‘healthy’ and ‘unhealthy’ conflict within teams and why is ‘healthy’ conflict so beneficial?
The ________ is a document which describes how the project management team will implement the performing...
The ________ is a document which describes how the project management team will implement the performing organization's quality policy. Group of answer choices Quality management plan Quality assurance plan Quality audit Quality commitment
the CASE STUDY : The management board of an organization want to start a project that...
the CASE STUDY : The management board of an organization want to start a project that can generate income in order to get a better financial position and better  quality of services it is rendering to the community. The Board of Directors asked you to help in sitting an operating budget including a cash budget for the six months ending 31/12/2018. The Board of Directors has promised to secure $100,000 for this project if it proves to be profitable. Their accountant...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT