Creative Ideas Company has decided to introduce a new product. The new product can be manufactured by either a capital-intensive method or a labor-intensive method. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows.

Capital-Intensive Labor-Intensive
Direct materials $6 per unit $6.50 per unit
Direct labor $7 per unit $9.00 per unit
Variable overhead $3 per unit $5.00 per unit
Fixed manufacturing costs $2,877,000 $1,767,000

Creative Ideas’ market research department has recommended an introductory unit sales price of $36. The incremental selling expenses are estimated to be $572,000 annually plus $2 for each unit sold, regardless of manufacturing method.

With the class divided into groups, answer the following.

(a)

Calculate the estimated break-even point in annual unit sales of the new product if Creative Ideas Company uses the: (Round answers to 0 decimal places, e.g. 5,275.)

(1) Capital-intensive manufacturing method.
(2) Labor-intensive manufacturing method.

Capital-Intensive Labor-Intensive
Break-even point in units

(b)

Determine the annual unit sales volume at which Creative Ideas Company would be indifferent between the two manufacturing methods. (Round answer to 0 decimal places, e.g. 5,275.)

Annual unit sales volume ____________ units

Snow Inc. has just completed development of a new cell phone. The new product is expected to produce annual revenues of $1,400,000. Producing the cell phone requires an investment in new equipment, costing $1,500,000. The cell phone has a projected life cycle of 5 years. After 5 years, the equipment can be sold for $180,000. Working capital is also expected to decrease by $200,000, which Snow will recover by the end of the new product’s life cycle. Annual cash operating expenses are estimated at $820,000. The required rate of return is 8%. Required:

1. Prepare a schedule of the projected annual cash flows.

2. Calculate the NPV using only discount factors from the Present Value of a Single Amount table shown in Present Value Tables.

3. Calculate the NPV using discount factors from both of the tables shown in Present Value Tables.

I really need help with the second question, please and thank you!

Suppose the federal government is considering requiring all new trucks to meet a new higher efficiency standard of 50 miles per gallon. Give an example of a cost and a benefit that might arise from this policy change.

The Bruin's Den Outdoor Gear is considering a new 6-year project to produce a new tent line. The equipment necessary would cost $1.15 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 10 percent of its initial cost. The company believes that it can sell 20,000 tents per year at a price of $57 and variable costs of $18 per tent. The fixed costs will be $325,000 per year. The project will require an initial investment in net working capital of $165,000 that will be recovered at the end of the project. The required rate of return is 9.9 percent and the tax rate is 35 percent. What is the NPV?

A project will reduce costs by $41,200 but increase depreciation by $20,100. What is the operating cash flow if the tax rate is 35 percent?

The Bruin's Den Outdoor Gear is considering making and selling custom kites in two sizes. The small kites would be priced at $11.50 and the large kites would be $24.50. The variable cost per unit is $5.55 and $12.10, respectively. Jill, the owner, feels that she can sell 3,100 of the small kites and 1,850 of the large kites each year. The fixed costs would be $2,120 a year and the depreciation expense is $1,400. The tax rate is 35 percent. What is the annual operating cash flow?

The Bruin's Den Outdoor Gear is considering a new 6-year project to produce a new tent line. The equipment necessary would cost $1.29 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 15 percent of its initial cost. The company believes that it can sell 23,500 tents per year at a price of $64 and variable costs of $25 per tent. The fixed costs will be $395,000 per year. The project will require an initial investment in net working capital of $193,000 that will be recovered at the end of the project. The required rate of return is 10.7 percent and the tax rate is 35 percent. What is the NPV?

The Bruin's Den Outdoor Gear is considering a new 6-year project to produce a new tent line. The equipment necessary would cost $1.29 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 15 percent of its initial cost. The company believes that it can sell 23,500 tents per year at a price of $64 and variable costs of $25 per tent. The fixed costs will be $395,000 per year. The project will require an initial investment in net working capital of $193,000 that will be recovered at the end of the project. The required rate of return is 10.7 percent and the tax rate is 35 percent. What is the NPV?

Multiple Choice

• $918,509

• $545,989

• $403,416

• $635,749

• $457,864

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $10 million, and production and sales will require an initial $5 million investment in net operating working capital. The company's tax rate is 35%.

What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

The company spent and expensed $150,000 on research related to the new project last year. Would this change your answer?

Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. How would this affect your answer?

The transactions listed below are typical of those involving New Books Inc. and Readers’ Corner. New Books is a wholesale merchandiser and Readers’ Corner is a retail merchandiser. Assume all sales of merchandise from New Books to Readers’ Corner are made with terms n/30, and the two companies use perpetual inventory systems. Assume the following transactions between the two companies occurred in the order listed during the year ended August 31.

1. New Books sold merchandise to Readers’ Corner at a selling price of $550,000. The merchandise had cost New Books $415,000.

2. Two days later, Readers’ Corner complained to New Books that some of the merchandise differed from what Readers’ Corner had ordered. New Books agreed to give an allowance of $10,000 to Readers’ Corner. Readers’ Corner also returned some books, which had cost New Books $2,000 and had been sold to Readers’ Corner for $3,500.

3. Just three days later, Readers’ Corner paid New Books, which settled all amounts owed.

Required:

1. Indicate the effect (direction and amount) of each transaction on the Inventory balance of Readers’ Corner.

2. Prepare the journal entries that Readers’ Corner would record and show any computations.

Oxygen Optimization is considering buying a new purification system. The new system would be purchased today for 19,200 dollars. It would be depreciated straight-line to 1,400 dollars over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be 2,000 dollars. The system is expected to reduce costs by 6,600 dollars in year 1 and by 14,700 dollars in year 2. If the tax rate is 50 percent and the cost of capital is 7.78 percent, what is the net present value of the new purification system project?

Please show your work