Question

In: Accounting

TML Smoothie Company has just completed a $10,000 feasibility study and decided to go with the...

TML Smoothie Company has just completed a $10,000 feasibility study and decided to go with the exercise fad and plans to open an exercise facility in conjunction with its main smoothie and health food store.   

TML Smoothie will rent additional space adjacent to its current store. The equipment required for the facility will cost $50,000. In addition, it must pay $5,000 in cash to cover the costs of shipping and installation of the equipment. This equipment will be depreciated on a straight-line basis over its 5 year useful life. The equipment will have an estimated salvage value of $4,000, but do not include the salvage value in the straight-line depreciation calculation. In order to open the exercise facility, TML estimates that it will have to add about $7,000 initially to its new working capital in the form of additional inventories of exercise supplies, cash, and accounts receivable for its exercise customers. Also, TML expects that it will have to add about $5,000 per year to its net working capital in years 1, 2, and 3 and nothing in years 4 and 5. During its first year of operations, TML expects its total revenues (from smoothies and exercise services) to increase by $50,000 above the level that would have prevailed without the exercise facility addition. These incremental revenues are expected to be $60,000 in year 2, $75,000 in year 3, $60,000 in year 4, and $45,000 in year 5. The company’s incremental operating costs associated with the exercise facility, including the rental of the facility, are expected to be $25,000 in year 1, $26,500 in year 2, $28,090 in year 3, $29,775 in year 4, $31,562 in year 5.

The company has a marginal tax rate of 40%. Finally, suppose the cost of capital is 10%.

Should TML Smoothie Company open an exercise facility?

Solutions

Expert Solution


Related Solutions

You have just completed a $16,000 feasibility study for a new coffee shop in some retail...
You have just completed a $16,000 feasibility study for a new coffee shop in some retail space you own. You bought the space two years ago for $102,000​, and if you sold it​ today, you would net $111,000 after taxes. Outfitting the space for a coffee shop would require a capital expenditure of $33,000 plus an initial investment of $5,200 in inventory. What is the correct initial cash flow for your analysis of the coffee shop​ opportunity? Identify the relevant...
You have just completed a $ 20 comma 000 feasibility study for a new coffee shop...
You have just completed a $ 20 comma 000 feasibility study for a new coffee shop in some retail space you own. You bought the space two years ago for $ 103 comma 000​, and if you sold it​ today, you would net $ 115 comma 000 after taxes. Outfitting the space for a coffee shop would require a capital expenditure of $ 25 comma 000 plus an initial investment of $ 4 comma 800 in inventory. What is the...
Swindler Ltd has completed a feasibility study costing $18,244to determine if there is any benefit...
Swindler Ltd has completed a feasibility study costing $18,244 to determine if there is any benefit in purchasing a new asset. The machine will cost $378,340 and an additional $11,277 will need to be spent to have the machine in an operational state. Before the machine can be used staff must be trained at a further cost of $7,308.The project is expected to last for 5 years and the Taxation Office has confirmed this. At the end of the project,...
Swindler Ltd has completed a feasibility study costing $22652 to determine if there is any benefit...
Swindler Ltd has completed a feasibility study costing $22652 to determine if there is any benefit in purchasing a new asset. The machine will cost $298115 and an additional $21316 will need to spent to have the machine in operational state. Before the machine can be used staff must be trained at a further cost of $6239. The project is expected to last for 5 years and the Taxation Office has confirmed this. At the end of the project the...
Swindler Ltd has completed a feasibility study costing $16769 to determine if there is any benefit...
Swindler Ltd has completed a feasibility study costing $16769 to determine if there is any benefit in purchasing a new asset. The machine will cost $318900 and an additional $14152 will need to spent to have the machine in operational state. Before the machine can be used staff must be trained at a further cost of $9602. The project is expected to last for 5 years and the Taxation Office has confirmed this. At the end of the project the...
Swindler Ltd has completed a feasibility study costing $22,378 to determine if there is any benefit...
Swindler Ltd has completed a feasibility study costing $22,378 to determine if there is any benefit in purchasing a new asset. The machine will cost $331,976 and an additional $11,128 will need to be spent to have the machine in operational state. Before the machine can be used staff must be trained at a further cost of $8,855. The project is expected to last for 5 years and the Taxation Office has confirmed this. At the end of the project...
Fruit-To-Go (FTG) processes fruit for shipping overseas. FTG commissioned a study to look into the feasibility...
Fruit-To-Go (FTG) processes fruit for shipping overseas. FTG commissioned a study to look into the feasibility of changing the packaging of the fruit from cans to sealed bags. The Consultant charged $54,000 for the report. The report concluded that the new packaging will increase sales and reduce some operating costs. The new packaging machinery will cost $1,100,000. The new machine is expected to last 5 years. The Taxation Office advise the life of the machine, for tax purposes, is 4...
Fruit-To-Go (FTG) processes fruit for shipping overseas. FTG commissioned a study to look into the feasibility...
Fruit-To-Go (FTG) processes fruit for shipping overseas. FTG commissioned a study to look into the feasibility of changing the packaging of the fruit from cans to sealed bags. The Consultant charged $54,000 for the report. The report concluded that the new packaging will increase sales and reduce some operating costs. The new packaging machinery will cost $1,100,000. The new machine is expected to last 5 years. The Taxation Office advise the life of the machine, for tax purposes, is 4...
The National Study of the Changing Work Force has just completed an extensive survey of 2958...
The National Study of the Changing Work Force has just completed an extensive survey of 2958 wage and salaried workers on issues ranging from relationships with their bosses to household chores. The data were gathered through hour-long telephone interviews with a nationally representative sample (The Wall Street Journal). In response to the question “What does success mean to you?” 1538 responded, “Personal satisfaction from doing a good job.” Based on your professional skills in statistical analysis, you have just been...
The life of the project is 5 years.  A feasibility study has been undertaken at...
The life of the project is 5 years.  A feasibility study has been undertaken at a cost of $2 million. The study concluded that at the end of the project the cost of restoring the environment of the mine would be approximately $ 1.2 million.  The project would require capital equipment of $8 million. The shipping and installation costs for this equipment are around $40,000. This equipment will be depreciated on a straight‐line basis over the life of...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT