2. A company is considering an investment of $600,000 in a new product line. The investment...

2. A company is considering an investment of $600,000 in a new product line. The investment will be made only if it will result in a rate of return of 20% per year or higher. If the net cash flow is expected to be between $150,000 and $250,000 per year for 6 years. Use present worth analysis to determine if the decision to invest is sensitive to the projected range of revenue. Show how you arrived at your decision. Please solve without using Table or excel

Solutions

Expert Solution

Let us assume the annual revenue for which the project if beneficial is $ A.

The required rate of return is 20%.

If the firm earns a return of $ 180,424 (Approximatly) then the rate of return is 20%. This I have calculated using equation. Now, we can do this using excel I have compared it using IRR. Refer the attached table.(Just for reference)

As we can see from the above table that when the revenue is greater than 180,423.45 the rate of return is greater than 20%. Thus, it is sensitive in the given range.

Please contact if having any query will be obliged to you for your generous support. Your help mean a lot to me, please help. Thank you.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

A company is considering an investment of $600,000 in a new product line. The investment will...

A company is considering an investment of $600,000 in a new product line. The investment will be made only if it will result in a rate of return of 20% per year or higher. If the net cash flow is expected to be between $150,000 and $250,000 per year for 6 years. Use present worth analysis to determine if the decision to invest is sensitive to the projected range of revenue. Show how you arrived at your decision

The company is considering adding a new product line that will require an investment of $1,454,000....

The company is considering adding a new product line that will require an investment of $1,454,000. Management estimates that this investment will have a 10-year life and generate future net cash inflows of $310,000 the first year, $280,000 the second year and $240,000 each year thereafter for eight years. Compute the payback period. (Hint: the payback period does not use the time value of money charts.)

A company is considering of a new product line that is believed to be marketable for...

A company is considering of a new product line that is believed to be marketable for the next 10 years. An initial investment of $215,000 will be required with an estimated salvage value of $40,000 at the end of 10 years. The annual receipts will start at $53,000, the first year and then increase by $2000 each year thereafter. Disbursements will start at $21,000 the first year and increase by $500 each year thereafter. What is the prospective rate of...

A Company is considering a new product line to supplement its range line. It is anticipated...

A Company is considering a new product line to supplement its range line. It is anticipated that the new product line will involve cash investment of $700,000 at time 0 and $1.0 million in year 1. After-tax cash inflows of $500,000 are expected in year 2, $300,000 in year 3, $700,000 in year 4, and $400,000 each year thereafter through year 10. Though the product line might be viable after year 10, the company prefers to be conservative and end...

A company is considering an investment in a new product with a 10-year horizon (product will...

A company is considering an investment in a new product with a 10-year horizon (product will be sold for 10 years). The upfront investment is $7 million and it is assumed to depreciate on a straight-line basis for 10 years, with no residual value. Fixed costs are assumed to be $500,000 per year. The company estimates variable cost per unit (v) to be $75 and expects to sell each unit for $315. There are no taxes and the required rate...

1. Mighty Manufacturing is considering investing $600,000 in a new production line. The new equipment is...

1. Mighty Manufacturing is considering investing $600,000 in a new production line. The new equipment is expected to generate a savings of $200,000 per year for each of the next five years. Mighty’s cost of capital is 5 percent. What is the net present value of the investment in the new production line? Disregard the effect of depreciation and taxes. A. $565,880. B. $456,980. C. $265,880. D. $650,490. 2. Parts Equipment Company is evaluating a plan to refit its machinery....

Briarcliff Stove Company is considering a new product line to supplement its range line. It is...

Briarcliff Stove Company is considering a new product line to supplement its range line. It is anticipated that the new product line will involve cash investment of $700,000 at time 0 and $1.0 million in year 1. After tax cash inflows of $250,000 are expected in year 2, $300,000 in year 3, $350,000 in year 4, and $400,000 each year thereafter through year 6. Though the product line might be viable after year 6, the company prefers to be conservative...

Company A is considering an investment in a new production line which will entail an immediate...

Company A is considering an investment in a new production line which will entail an immediate capital expenditure of €1,200,000, an increase in accounts receivables by €100,000 and a decrease in accounts payable by €100,000. The production line is going to be depreciated on a straight-line basis over 5 years with no expected salvage value. The sales and operating expenses of the company are expected to increase by €600,000 and €100,000 per year respectively, over the 5-year life of the...

Zachary Company is considering the addition of a new product to its cosmetics line. The company...

Zachary Company is considering the addition of a new product to its cosmetics line. The company has three distinctly different options: a skin cream, a bath oil, or a hair coloring gel. Relevant information and budgeted annual income statements for each of the products follow. Relevant Information Skin Cream Bath Oil Color Gel Budgeted sales in units (a) 140,000 220,000 100,000 Expected sales price (b) $ 7 $ 7 $ 15 Variable costs per unit (c) $ 2 $ 4...

Walton Company is considering the addition of a new product to its cosmetics line. The company...

Walton Company is considering the addition of a new product to its cosmetics line. The company has three distinctly different options: a skin cream, a bath oil, or a hair coloring gel. Relevant information and budgeted annual income statements for each of the products follow. Relevant Information Skin Cream Bath Oil Color Gel Budgeted sales in units (a) 138,000 218,000 98,000 Expected sales price (b) $ 10 $ 9 $ 16 Variable costs per unit (c) $ 2 $ 4...

Subjects