Question
In: Accounting
Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a...
Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product:
- Expected annual revenues: $750,000
- Projected product life cycle: five years
- Equipment: $800,000 with a salvage value of $100,000 after five years
- Expected increase in working capital: $100,000 (recoverable at the end of five years)
- Annual cash operating expenses: estimated at $450,000
- Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.
Required:
1. Estimate the annual cash flows for the new product. Enter cash outflows as negative amounts and cash inflows as positive amounts.
| Year | Cash Flow |
| 0 | $ |
| 1–4 | $ |
| 5 | $ |
2. Using the estimated annual cash flows,
calculate the NPV.
$
3. What if revenues were overestimated by $150,000? Redo the NPV analysis, correcting for this error. Assume the operating expenses remain the same. Enter cash outflows as negative amounts and cash inflows as positive amounts.
| Year | Cash Flow | Present Value |
| 0 | $ | $ |
| 1–4 | ||
| 5 | ||
| Net present value | $ |
Solutions
Expert Solution
| Part- 1&2 Computation of Annual Cash Flow & NPV- Carsen Sorensen | ||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| Cost Of Machine | -$800,000.00 | |||||
| Investment In Working Capital | -$100,000.00 | |||||
| Expected Annual Revenue | $750,000.00 | $750,000.00 | $750,000.00 | $750,000.00 | $750,000.00 | |
| Less Operating Expense | -$450,000.00 | -$450,000.00 | -$450,000.00 | -$450,000.00 | -$450,000.00 | |
| Operating Profit | $300,000.00 | $300,000.00 | $300,000.00 | $300,000.00 | $300,000.00 | |
| Recovery Of Working Capital | $100,000.00 | |||||
| Scrap Value Of Equipment | $100,000.00 | |||||
| Net Operating Cash Flow (a) | -$900,000.00 | $300,000.00 | $300,000.00 | $300,000.00 | $300,000.00 | $500,000.00 |
| PVF @ 8% (b) | 1.000000 | 0.925926 | 0.857339 | 0.793832 | 0.735030 | 0.680583 |
| Present Value (aXb) | -$900,000.00 | $277,777.78 | $257,201.65 | $238,149.67 | $220,508.96 | $340,291.60 |
| NPV" | $433,929.65 | |||||
| Part-3 Commputation of NPV | ||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| Cost Of Machine | -$800,000.00 | |||||
| Investment In Working Capital | -$100,000.00 | |||||
| Expected Annual Revenue | 900000 | 900000 | 900000 | 900000 | 900000 | |
| Less Operating Expense | -$450,000.00 | -$450,000.00 | -$450,000.00 | -$450,000.00 | -$450,000.00 | |
| Operating Profit | $450,000.00 | $450,000.00 | $450,000.00 | $450,000.00 | $450,000.00 | |
| Recovery Of Working Capital | $100,000.00 | |||||
| Scrap Value Of Equipment | $100,000.00 | |||||
| Net Operating Cash Flow (a) | -$900,000.00 | $450,000.00 | $450,000.00 | $450,000.00 | $450,000.00 | $650,000.00 |
| PVF @ 8% (b) | 1.0000 | 0.9259 | 0.8573 | 0.7938 | 0.7350 | 0.6806 |
| Present Value (aXb) | -$900,000.00 | $416,666.67 | $385,802.47 | $357,224.51 | $330,763.43 | $442,379.08 |
| NPV" | $1,032,836.16 | |||||
ekkarill92 answered 1 year agoRelated Solutions
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
Net Present Value
Carsen Sorensen, controller of Thayn Company, just received the
following data associated with production of a new product:
Expected annual revenues: $720,000
Projected product life cycle: five years
Equipment: $740,000 with a salvage value of $100,000 after five
years
Expected increase in working capital: $120,000 (recoverable at
the end of five years)
Annual cash operating expenses: estimated at $432,000
Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must...
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
Net Present Value
Carsen Sorensen, controller of Thayn Company, just received the
following data associated with production of a new product:
Expected annual revenues: $760,000
Projected product life cycle: five years
Equipment: $780,000 with a salvage value of $100,000 after five
years
Expected increase in working capital: $100,000 (recoverable at
the end of five years)
Annual cash operating expenses: estimated at $456,000
Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must...
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
Net Present Value
Carsen Sorensen,
controller of Thayn Company, just received the following data
associated with production of a new product:
Expected annual revenues: $740,000
Projected product life cycle: five years
Equipment: $730,000 with a salvage value of $100,000 after five
years
Expected increase in working capital: $100,000 (recoverable at
the end of five years)
Annual cash operating expenses: estimated at $444,000
Required rate of return: 8 percent
The present value
tables provided in Exhibit 19B.1 and Exhibit 19B.2 must...
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
Net Present Value
Carsen Sorensen, controller of Thayn Company, just received the
following data associated with production of a new product:
Expected annual revenues: $740,000
Projected product life cycle: five years
Equipment: $720,000 with a salvage value of $100,000 after five
years
Expected increase in working capital: $100,000 (recoverable at
the end of five years)
Annual cash operating expenses: estimated at $444,000
Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must...
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
Net Present Value Carsen Sorensen, controller of Thayn Company,
just received the following data associated with production of a
new product: Expected annual revenues: $740,000 Projected product
life cycle: five years Equipment: $720,000 with a salvage value of
$100,000 after five years Expected increase in working capital:
$100,000 (recoverable at the end of five years) Annual cash
operating expenses: estimated at $444,000 Required rate of return:
8 percent The present value tables provided in Exhibit 19B.1 and
Exhibit 19B.2 must...
Rome Company manufactures three products, A, B, and C. The company’s controller has just received the...
Rome Company manufactures three products, A, B, and C. The
company’s controller has just received the upcoming year’s sales
forecast for the firm’s three products. Rome has experienced
considerable variations in sales volumes and variable costs over
the past two years, and the controller believes that the forecast
should be carefully evaluated from a cost-volume-profit viewpoint.
The preliminary budget information for next year follows. A B C
Unit sales 40,000 40,000 80,000 Unit selling price $80 $110 $135
Variable product...
"A manufacturing company has just received an order with the following financial data. All dollar values...
"A manufacturing company has just received an order with the
following financial data. All dollar values are given in constant
dollars, and inflation will impact the annual revenue, annual
operating cost, and the salvage value. The two-year project
requires immediately purchasing equipment for $59,000. The
equipment falls into the MACRS 5-year class. The machine will be
sold for $19,000 at the end of two years. The project will bring in
additional annual revenue of $99,000, but it is expected to...
"A manufacturing company has just received an order with the following financial data. All dollar values...
"A manufacturing company has just received an order with the
following financial data. All dollar values are given in constant
dollars, and inflation will impact the annual revenue, annual
operating cost, and the salvage value. The two-year project
requires immediately purchasing equipment for $56,000. The
equipment falls into the MACRS 5-year class. The machine will be
sold for $22,000 at the end of two years. The project will bring in
additional annual revenue of $82,000, but it is expected to...
"A manufacturing company has just received an order with the following financial data. All dollar values...
"A manufacturing company has just received an order with the
following financial data. All dollar values are given in constant
dollars, and inflation will impact the annual revenue, annual
operating cost, and the salvage value. The two-year project
requires immediately purchasing equipment for $56,000. The
equipment falls into the MACRS 5-year class. The machine will be
sold for $22,000 at the end of two years. The project will bring in
additional annual revenue of $82,000, but it is expected to...
The controller of Blossom Production has collected the following monthly expense data for analyzing the cost...
The controller of Blossom Production has collected the following
monthly expense data for analyzing the cost behavior of electricity
costs.
Total
Electricity Costs
Total
Machine Hours
January
$2,660
230
February
3,050
330
March
3,520
460
April
4,770
690
May
3,190
420
June
4,960
790
July
4,030
650
August
3,870
590
September
5,040
670
October
4,270
610
November
3,260
330
December
8,460
810
(a)
Determine the fixed- and variable-cost components using the
high-low method.
Fixed-costs
$
Variable-costs
$
eTextbook and Media...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Compare the MOSFET, JFET , and BJT and identify the reasons these devices behave differently. What...
- How would you use SAS Enterprise Miner to create a neural network model of your example?
- Explain the use of neural networking modeling in predictive analytics.
- Current Market Mix of Netflix, as detail as possible, please.
- This is all one question, thank you so much in advance! You must evaluate a proposal...
- X Company is considering the purchase of a new processor that costs $200,000. Shipping and setup...
- There are a large number of tasks involved in information technology and programming, and many of...
ADVERTISEMENT