a) Harrison Corporation expects to sell 8,500 units per year of its new product at $68 net cash flow a piece for the next10 years. The relevant discount rate is 14 percent, and the initial investment required is $2,300,000.i) Compute the Net Present Value (NPV) of the new product.ii) After the first year, the project can be dismantled and sold for $1,500,000. Calculate the lowest sale quantity levelbelow which it would make sense to abandon the project.iii) Explain how the $1,500,000 abandonment value can be viewed as the opportunity cost of keeping the project inone year.b) The Board of Directors of Kimchi Corporation has recently considered to substitute its historically high cashdividend payouts with share repurchase in order to "make better use of our cash flows and to capitalize on our stocksthat has undergone a prolonged period of sluggish performance due to the COVID pandemic" as put forward by itsCEO. Discuss whether you agree or disagree with the CEO's view in relation to the advantages and disadvantages ofshare repurchase compared to cash dividend payments. (Word limit: Maximum 500 words, sentences writtenafter the word limit will not be marked)=

“Since you have posted a question with multiple sub-parts, we will solve first three subparts for…

a) Harrison Corporation expects to sell 8,500 units per year of its new product at $68 net cash flow a piece for the next 10 years. The relevant discount rate is 14 percent, and the initial investment required is $2,300,000. i) Compute the Net Present Value (NPV) of the new product. ii) After the first year, the project can be dismantled and sold for $1,500,000. Calculate the lowest sale quantity level below which it would make sense to abandon the project. iii) Explain how the $1,500,000 abandonment value can be viewed as the opportunity cost of keeping the project in one year.

a) Harrison Corporation expects to sell 8,500 units per year of its new product at $68 net cash flow a piece for the next 10 years. The relevant discount rate is 14 percent, and the initial investment required is $2,300,000. i) Compute the Net Present Value (NPV) of the new product. ii) After the first year, the project can be dismantled and sold for $1,500,000. Calculate the lowest sale quantity level below which it would make sense to abandon the project. iii) Explain how the $1,500,000 abandonment value can be viewed as the opportunity cost of keeping the project in one year.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 10E: Roberts Company is considering an investment in equipment that is capable of producing more...

See similar textbooks

Similar questions

The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 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.
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.
Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?
Markoff Products is considering two competing projects, but only one will be selected. Project A requires an initial investment of $42,000 and is expected to generate future cash flows of $6,000 for each of the next 50 years. Project B requires an initial investment of $210,000 and will generate $30,000 for each of the next 10 years. If Markoff requires a payback of 8 years or less, which project should it select based on payback periods?
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?
Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated revenue producing lite of 4 years. Mason has a required rate of return that is 12% and a cost of capital of 11%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is 2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Required: 1. Compute the projects payback period. 2. Compute the projects accounting rate of return. 3. Compute the projects net present value, assuming a required rate of return of 10 percent. 4. Compute the projects internal rate of return.
We are examining a new project. We expect to sell 6,100 units per year at $75 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $75 × 6,100 = $457,500. The relevant discount rate is 18 percent, and the initial investment required is $1,720,000. After the first year, the project can be dismantled and sold for $1,550,000. Suppose you think it is likely that expected sales will be revised upward to 9,100 units if the first year is a success and revised downward to 4,700 units if the first year is not a success. Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would only be desirable if the project were a success. This implies that if the project is a success, projected sales after expansion will be 18,200. Note that abandonment is an option if the project is a failure. a. If success and failure are equally likely, what is the NPV of the project?…
We are examining a new project. We expect to sell 6,000 units per year at $74 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $74 × 6,000 = $444,000. The relevant discount rate is 18 percent, and the initial investment required is $1,710,000. After the first year, the project can be dismantled and sold for $1,540,000. Suppose you think it is likely that expected sales will be revised upward to 9,000 units if the first year is a success and revised downward to 4,600 units if the first year is not a success. a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the option to abandon? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)