+8 of 5opedRequired information[The following information applies to the questions displayed below.]Beacon Company is considering automating its production facility. The initial investment in automation would be $9.11million, and the equipment has a useful life of 7 years with a residual value of $1,200,000. The company will use straight-line depreciation. Beacon could expect a production increase of 44,000 units per year and a reduction of 20 percent inthe labor cost per unit.Proposed(automation)115,000 unitsCurrent (noautomation)71,000 unitsPerPerProduction and sales volumeUnitTotalUnitTotalookSales revenue$ 90$ ?$ 90$ ?Variable costs.Direct materials$16$ 16Direct labor15intVariable manufacturing overhead9?9Total variable manufacturing costs40?Contribution margin$50?$ 53?Fixed manufacturing costs$ 1,130,000$ 2,330,000encesNet operating income??3. Determine the project's payback period. (Round your answer to 2 decimal places.)Payback periodyears

Current (No automation) 71,000 unitsProposed ( automation) 115,000 unitsProduction & Sales…

Answered: Required information [The following…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 14P

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Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
Austins cell phone manufacturer wants to upgrade their product mix to encompass an exciting new feature on their cell phone. This would require a new high-tech machine. You are excited about his new project and are recommending the purchase to your board of directors. Here is the information you have compiled in order to complete this recommendation: According to the information, the project will last 10 years and require an initial investment of $800,000, depreciated with straight-line over the life of the project until the final value is zero. The firms tax rate is 30% and the required rate of return is 12%. You believe that the variable cost and sales volume may be as much as 10% higher or lower than the initial estimate. Your boss understands the risks but asks you to explain the alternatives in a brief memo to the board, Write a memo to the Board of Directors objectively weighing out the pros and cons of this project and make your recommendation(s).
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 25%. What is the initial investment outlay? The company spent and expensed $150,000 on research related to the new product last year. What is the initial investment outlay? 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. What is the initial investment outlay?
5. Required information [The following information applies to the questions displayed below.]Beacon Company is considering automating its production facility. The initial investment in automation would be $12.39 million, and the equipment has a useful life of 10 years with a residual value of $1,090,000. The company will use straight-line depreciation. Beacon could expect a production increase of 34,000 units per year and a reduction of 20 percent in the labor cost per unit. Current (no automation) 75,000 units Current (no automation) 75,000 units Proposed (automation) 109,000 units Proposed (automation) 109,000 units Production and sales volume Per Unit Total Per Unit Total Sales revenue $92 $ ? $ 92 $? Variable costs Direct materials $17 $17 Direct labor 20 ? Variable manufacturing overhead 12 12 Total variable manufacturing costs 49 ? Contribution margin $43 ? $47 ? Fixed manufacturing costs $ 1,100,000 $ 2,270,000…
6. Required information [The following information applies to the questions displayed below.]Beacon Company is considering automating its production facility. The initial investment in automation would be $12.39 million, and the equipment has a useful life of 10 years with a residual value of $1,090,000. The company will use straight-line depreciation. Beacon could expect a production increase of 34,000 units per year and a reduction of 20 percent in the labor cost per unit. Current (no automation) 75,000 units Current (no automation) 75,000 units Proposed (automation) 109,000 units Proposed (automation) 109,000 units Production and sales volume Per Unit Total Per Unit Total Sales revenue $92 $ ? $ 92 $? Variable costs Direct materials $17 $17 Direct labor 20 ? Variable manufacturing overhead 12 12 Total variable manufacturing costs 49 ? Contribution margin…
Required information [The following information applies to the questions displayed below.] Beacon Company is considering automating its production facility. The initial investment in automation would be $10.31 million, and the equipment has a useful life of 8 years with a residual value of $1,030,000. The company will use straight- line depreciation. Beacon could expect a production increase of 43,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Sales revenue Variable costs Direct materials Direct labor Variable manufacturing overhead Current (no automation) 82,000 units Proposed (automation) 125,000 units Per Unit Per Total Unit Total $ 96 $ ? $ 96 $ ? $ 16 $ 16 15 ? 9 9 Total variable manufacturing costs 40 Contribution margin $ 56 49 ? ? $ 59 ? Fixed manufacturing costs $ 1,240,000 $ 2,330,000 Net operating income. ? ? 3. Determine the project's payback period. (Round your answer to 2 decimal places.) Payback period years
Required information [The following information applies to the questions displayed below.] Beacon Company is considering automating its production facility. The initial investment in automation would be $11.45 million, and the equipment has a useful life of 9 years with a residual value of $1,100,000. The company will use straight- line depreciation. Beacon could expect a production increase of 46,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Sales revenue Variable costs Direct materials Direct labor Variable manufacturing overhead Total variable manufacturing costs Contribution margin Fixed manufacturing costs Net operating income Payback period Current (no automation) 87,000 units years Per Unit $92 $19 25 9 53 $39 Total $ ? ? $ 1,100,000 ? Proposed (automation) 133,000 units Per Unit $92 $19 ? 9 ? $44 Total $ ? 3. Determine the project's payback period. (Round your answer to 2 decimal places.) ? $ 2,330,000 ?
Required information [The following information applies to the questions displayed below.] Beacon Company is considering automating its production facility. The initial investment in automation would be $7.52 million, and the equipment has a useful life of 6 years with a residual value of $1,100,000. The company will use straight- line depreciation. Beacon could expect a production increase of 47,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Sales revenue Variable costs Direct materials. Direct labor Variable manufacturing overhead Total variable manufacturing costs Contribution margin Fixed manufacturing costs Net operating income Current (no automation) 81,000 Proposed (automation) 128,000 units units Net present value Per Unit $94 $ 17 30 9 56 $ 38 Total $ ? ? 1,240,000 ? Per Unit $94 $ 17 ? 9 ? $44 Total $? ? 2,200,000 ? Required: 5. Recalculate the NPV using a 9 percent discount rate. (Future Value of $1. Present Value of…
Required information [The following information applies to the questions displayed below.] Beacon Company is considering automating its production facility. The initial investment in automation would be $11.45 million, and the equipment has a useful life of 9 years with a residual value of $1,100,000. The company will use straight- line depreciation. Beacon could expect a production increase of 46,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Sales revenue Variable costs Direct materials Direct labor Variable manufacturing overhead Total variable manufacturing costs Contribution margin Fixed manufacturing costs Net operating income Current (no automation) 87,000 units Net present value Per Unit $92 $19 25 9 53 $39 Total $ ? ? $ 1,100,000 ? Proposed (automation) 133,000 units Per Unit $92 $19 ? 9 ? $44 Total $ ? ? $ 2,330,000 ? 5. Recalculate the NPV using a 8 percent discount rate. (Future Value of $1, Present Value of $1,…
Required information [The following information applies to the questions displayed below.] Beacon Company is considering automating its production facility. The initial investment in automation would be $7.52 million, and the equipment has a useful life of 6 years with a residual value of $1,100,000. The company will use straight- line depreciation. Beacon could expect a production increase of 47,000 units per year and a reduction of 20 percent in the labor cost per unit. Production and sales volume Sales revenue Variable costs Direct materials Direct labor. Variable manufacturing overhead Total variable manufacturing costs Contribution margin Fixed manufacturing costs Net operating income Current (no automation) 81,000 Proposed (automation) 128,000 units units Net present value Per Unit $94 $17 30 9 56 $38 Total $ ? ? 1,240,000 ? Per Unit $94 $17 P 9 ? $44 Total $ ? ? 2,200,000 Required: 4. Using a discount rate of 14 percent, calculate the net present value (NPV) of the proposed…

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