QUESTION 7

1. an organization toys for many shops. Due to its excess capacity, the company tries to start a new product line to manufacture a new toy car model. The company has gathered the following information on the product line from which the company can make 1,000 toy cars. For each toy car, the direct materials cost $60, direct labor costs $40, and total manufacturing overhead costs $20. Due to the excess capacity, producing the new toy car has no impact on fixed manufacturing overhead. However, a total of $10,000 fixed manufacturing overhead is absorbed by this new product line under the company’s absorption costing system.

   1. What is total variable cost for producing each unit of toy car?
   2. The company is considering renting a new equipment to produce the new toy cars. The rental fee for producing 1,000 toy cars is $40,000. The new equipment will effectively reduce each toy’s direct labor cost by 30%, direct materials cost by 50%, and variable manufacturing overhead by 50%. Is it worthwhile for the company to rent the new equipment?
   3. The company’s accountant has successfully traced many costs to each unit of the new toy car. She also wonders whether she should simply record all of the traceable costs as relevant costs. What is your opinion? Please support your answer with explanation.

Calculating 'Cash flows at the start'

Dreamtime Jewellers Limited (DJL) is a small network of jewellery stores and DJL is considering building a new store. The new store costs $2.5 million and managers plan to partly fund the store with a $1 million five-year bank loan.

In addition, DJL must spend $150,000 on excavation before they build the new store. Because this expense will reduce the new store’s profitability, managers have suggested that the excavation expense be spread out equally over the five-year analysis period.

The ATO states that excavation qualifies as a business expense in the year incurred. DJL has already spent $100,000 conducting market research to determine the most lucrative location for a new store.

If the directors approve the new store DJL anticipates that it will require an additional $400,000 of inventory today on top of the existing level of $1.5 million, and accounts payable will increase by $270,000. The accounts receivable balance will increase from the current level of $5.4 million to $6.2 million if the new store proceeds.

DJL must dispose of $120,000 of redundant jewellery equipment today if the new store is approved. The equipment initially cost $300,000 four years ago and is fully depreciated for tax purposes. Assume the company tax rate is 30%.

What are the 'cash flows at the start'?

[Describe and list separately each cash flow and the corresponding amount on a new line, as in lecture and tutorial examples.]

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .75. It’s considering building a new $51 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $6.3 million in perpetuity. The company raises all equity from outside financing. There are three financing options:

1. A new issue of common stock: The flotation costs of the new common stock would be 8.1 percent of the amount raised. The required return on the company’s new equity is 15 percent.

2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 3.1 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 5.2 percent, they will sell at par.

3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .10. Assume there is no difference between the pretax and aftertax accounts payable costs.

What is the NPV of the new plant?

Assume that PC has a 21 percent tax rate. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt−equity ratio of .8. It’s considering building a new $53 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $6.5 million in perpetuity. The company raises all equity from outside financing. There are three financing options:

1. A new issue of common stock: The flotation costs of the new common stock would be 8.3 percent of the amount raised. The required return on the company’s new equity is 14 percent.

2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 5.0 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 8 percent, they will sell at par.

3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .15. (Assume there is no difference between the pretax and aftertax accounts payable cost.)

What is the NPV of the new plant? Assume that PC has a 35 percent tax rate. (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount, e.g., 32.) NPV $

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .65. It’s considering building a new $69 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $6.9 million in perpetuity. The company raises all equity from outside financing. There are three financing options:

1. A new issue of common stock: The flotation costs of the new common stock would be 7.1 percent of the amount raised. The required return on the company’s new equity is 12 percent.

2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.3 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 4 percent, they will sell at par.

3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .20. (Assume there is no difference between the pretax and aftertax accounts payable cost.)

What is the NPV of the new plant? Assume that PC has a 22 percent tax rate. (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,567.)

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt−equity ratio of .8. It’s considering building a new $53 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $6.5 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 8.3 percent of the amount raised. The required return on the company’s new equity is 14 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 5.0 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 8 percent, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .15. (Assume there is no difference between the pretax and aftertax accounts payable cost.) What is the NPV of the new plant? Assume that PC has a 35 percent tax rate. (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount, e.g., 32.) NPV $

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt−equity ratio of .85. It’s considering building a new $58 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 8.8 percent of the amount raised. The required return on the company’s new equity is 13 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 4.0 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 7 percent, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .20. (Assume there is no difference between the pretax and aftertax accounts payable cost.) What is the NPV of the new plant? Assume that PC has a 40 percent tax rate. (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount, e.g., 32.) NPV