Questions 14-20 all pertain to the following capital budgeting project. The problem will be repeated in...

Questions 14-20 all pertain to the following capital budgeting project. The problem will be repeated in each question.

MHI Corp. is considering a capital budgeting project developing a new and improved home management system that will allow customers to easily inventory frequently purchased items for their home and to receive reminders when these items need to be repurchased. The firm’s WACC is 6.7%. The project is slightly more risky that the average project of the firm. You have been advised to add a 3.1% premium to the firm’s WACC for the discount rate for this project. The project requires an investment of $4 million for new manufacturing equipment. This equipment will be depreciated using 5-year MACRS depreciation. The project will last three (3) years. At the end of three (3) years, the firm believes they will be able to sell this equipment for $1,000,000. The firm expects to sell 2,500 units each year as a selling price of $1,000 per unit. The cost of goods sold is expected to be 35% of revenues. Salaries and marketing expenses related to this project are expected to be $500,000 each year of the project. The project requires an initial investment in net working capital of $300,000. All working capital will be returned to the firm at the end of the project. The marginal tax rate for the firm is 34%.

Should this project be accepted? Why or why not?

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Complete this problem and respond to the following questions: Here it is: Capital budgeting criteria: ethical...

Complete this problem and respond to the following questions: Here it is: Capital budgeting criteria: ethical considerations An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental Problem,...

Part 2 Please study the following capital budgeting project and then provide explanations for the questions...

Part 2 Please study the following capital budgeting project and then provide explanations for the questions outlined below: You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $2.1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal,...

Please study the following capital budgeting project and then provide explanations for the questions outlined below:...

Please study the following capital budgeting project and then provide explanations for the questions outlined below: You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $2.1 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company...

Mester Corporation has provided the following information concerning a capital budgeting project: After-tax discount rate 14...

Mester Corporation has provided the following information concerning a capital budgeting project: After-tax discount rate 14 % Tax rate 30 % Expected life of the project 4 Investment required in equipment $ 120,000 Salvage value of equipment $ 0 Annual sales $ 230,000 Annual cash operating expenses $ 150,000 One-time renovation expense in year 3 $ 25,000 Click here to view Exhibit 13B-1 to determine the appropriate discount factor(s) using tables. The company uses straight-line depreciation on all equipment. Assume...

6) Refer to the capital budgeting narrative. What is the MIRR of the project? Capital Budgeting...

6) Refer to the capital budgeting narrative. What is the MIRR of the project? Capital Budgeting Narrative: (Use the following information for questions referring to the narrative): Aferine Electric is considering a new project. The initial investment required is $106,639.60 and the cost of capital is 8%. Expected cash flows over the next four years are given below: Years Cash Flow ($) 1 7,000 2 37,000 3 41,000 4 90,000 A) 17.1% B) 13.8% C) 14.1% D) 15.0% E) 8%

13. What is capital budgeting? Why capital budgeting decisions are so important to business? 14. What...

13. What is capital budgeting? Why capital budgeting decisions are so important to business? 14. What are the five steps of capital budgeting? 15. Role of financial analysis 16. Cash flow estimation 17. What is breakeven analysis in capital budgeting? 18. Uneven cash flows stream and how to approach these problems 19. Describe payback period, NPV and IRR? 20. What is MIRR?

The following questions all pertain to confidence intervals or hypothesis tests (with regard to the parameter...

The following questions all pertain to confidence intervals or hypothesis tests (with regard to the parameter μ, with σ known). a. If the sample size is divided by a factor of 9, then the width of a confidence interval for μ (for any choice of confidence coefficient) will be multiplied by _______ . A. 1/9 B. 9 C. 1/3 D. 3 b. If the sample size n is selected so as to make the 95% margin of error roughly equal...

Problem - Capital Budgeting CGX Transmitters is developing a 2nd generation optical transmitter. The project will...

Problem - Capital Budgeting CGX Transmitters is developing a 2nd generation optical transmitter. The project will last for three years, at that time work will begin on 3rd generation optical transmitters. CGX always uses straight line depreciation. The equipment will cost $12.5M and at the end of three years, the salvage value of the equipment will be $3.5M. Sales are expected to be $20M in year 1 and grow at 35% in years 2 and 3. Cost of Goods Sold will be 60% of...

All there is to know about Capital Budgeting.

Problem 10-10 Capital Budgeting Methods Project S has a cost of $11,000 and is expected to...

Problem 10-10 Capital Budgeting Methods Project S has a cost of $11,000 and is expected to produce benefits (cash flows) of $3,400 per year for 5 years. Project L costs $23,000 and is expected to produce cash flows of $6,900 per year for 5 years. Calculate the two projects' NPVs, assuming a cost of capital of 14%. Round your answers to the nearest cent. Project S $ Project L $ Which project would be selected, assuming they are mutually exclusive?...

Subjects