Question

In: Finance

Management of Group R Corporation is considering an expansion in the company’s product line that requires...

Management of Group R Corporation is considering an expansion in the company’s product line that requires the purchase of an additional $185,000 in equipment with installation cost of $15,000 and removal expense of $5,000. The equipment and installation costs will be depreciated over five years using straight-line depreciation method. The expansion is expected to increase earnings before depreciation and taxes as follows: Year 1 $60,000 Year 2 $60,000 Year 3 $75,000 Year 4 $75,000 Year 5 $50,000 Group R Corporation’s income tax rate is 20 percent, and the weighted average cost of capital is 10 percent. Because of uncertainty in the market, the company’s financial analyst predicts that the likelihood that the worst-case scenario happening is 20%; and the likelihood of the best-case scenario occurring is 30%. Based upon the net present value method of capital budgeting should management undertake this project?

Solutions

Expert Solution

Statement showing NPV

Particulras 0 1 2 3 4 5 NPV = Sum of PV
Purchase cost of equipment -185000
Instalation cost -15000
Removal expense -5000
Increased EBIT 60000 60000 75000 75000 50000
Depreciation((185000+15000)/5)
=200000/5
=40000 pa
40000 40000 40000 40000 40000
PBT 20000 20000 35000 35000 10000
Tax rate @ 20% 4000 4000 7000 7000 2000
PAT 16000 16000 28000 28000 8000
Add: Depreciation 40000 40000 40000 40000 40000
Cash flow 56000 56000 68000 68000 48000
Total cash flow -205000 56000 56000 68000 68000 48000
PVIF @ 10% 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209
PV (Total cash flow*PVIF) -205000.00 50909.09 46280.99 51089.41 46444.91 29804.22 19528.63

Since NPV is positive management should undertake the project


Related Solutions

Management of Group A Corporation is considering an expansion in the company’s product line that requires...
Management of Group A Corporation is considering an expansion in the company’s product line that requires the purchase of an additional $200,000 in equipment with installation cost of $20,000 and removal expense of $5,000. The equipment and installation costs will be depreciated over five years using straight-line depreciation method. The expansion is expected to increase earnings before depreciation and taxes as follows: Expected Worst Best Year 1 $75,000 $50,000 $100,000 Year 2 $ 75,000 $60,000 $100,000 Year 3 $90,000 $75,000...
Management of Lakeside, Inc. is considering an investment in an expansion of the company's                product line....
Management of Lakeside, Inc. is considering an investment in an expansion of the company's                product line. The estimated investment required will be $162,500. You can assume that the full amount will be invested at the beginning of 2013. The estimated cash returns from the new product line are shown in the following table. You should assume that the returns are received at the end of each of the years indicated, and that Lakeside, Inc.’s cost of capital is 12%. Year...
-Financial Management Principles Fijisawa Inc. is considering a major expansion of its product line and has...
-Financial Management Principles Fijisawa Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion, the initial outlay would be $1,900,000 and the project would generate cash flows of $450,000 per year for six years, the appropriate discount rate is 9%. Calculate the net present value. Calculate the profitability index. Calculate the internal rate of return. Should this project be accepted? Why or why not? 2.Gio’s Restaurants is considering...
The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for...
The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for the upcoming year appear below: Sales $ 970,000 Variable expenses $ 393,000 Fixed manufacturing expenses $ 375,000 Fixed selling and administrative expenses $ 255,000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $243,000 of the fixed manufacturing expenses and $204,000 of the fixed selling and administrative expenses are avoidable if product...
The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for...
The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for the upcoming year appear below: Sales $ 940,000 Variable expenses $ 390,000 Fixed manufacturing expenses $ 372,000 Fixed selling and administrative expenses $ 252,000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $237,000 of the fixed manufacturing expenses and $198,000 of the fixed selling and administrative expenses are avoidable if product...
The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for...
The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for the upcoming year appear below: Sales $ 920,000 Variable expenses $ 388,000 Fixed manufacturing expenses $ 370,000 Fixed selling and administrative expenses $ 250000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $233,000 of the fixed manufacturing expenses and $194,000 of the fixed selling and administrative expenses are avoidable if product...
The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for...
The management of Furrow Corporation is considering dropping product L07E. Data from the company’s budget for the upcoming year appear below: Sales $ 950,000 Variable expenses $ 396,000 Fixed manufacturing expenses $ 378,000 Fixed selling and administrative expenses $ 258,000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $249,000 of the fixed manufacturing expenses and $210,000 of the fixed selling and administrative expenses are avoidable if product...
MegaWash, Inc., is considering an expansion of their product line to Mexico. This would require a...
MegaWash, Inc., is considering an expansion of their product line to Mexico. This would require a purchase of equipment with a price of 3,000,000MXN and additional installation of 500,000MXN, to be depreciated straight-line to zero over the 5-year life of the asset. They will not be replacing any existing equipment. Their required rate of return is 15% and they are in the 35% tax bracket. The new product line is expected to increase sales by 800,000MXN per year over current...
MegaWash, Inc., is considering an expansion of their product line to Mexico. This would require a...
MegaWash, Inc., is considering an expansion of their product line to Mexico. This would require a purchase of equipment with a price of 3,000,000MXN and additional installation of 500,000MXN, to be depreciated straight-line to zero over the 5-year life of the asset. They will not be replacing any existing equipment. Their required rate of return is 15% and they are in the 35% tax bracket. The new product line is expected to increase sales by 800,000MXN per year over current...
MegaWash, Inc., is considering an expansion of their product line to Mexico. This would require a...
MegaWash, Inc., is considering an expansion of their product line to Mexico. This would require a purchase of equipment with a price of 3,000,000MXN and additional installation of 500,000MXN, to be depreciated straight-line to zero over the 5-year life of the asset. They will not be replacing any existing equipment. Their required rate of return is 15% and they are in the 35% tax bracket. The new product line is expected to increase sales by 800,000MXN per year over current...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT