Assignment 6
- Winnebagel Corp. currently sells 19,200 motor homes per year at $28,800 each, and 7,680 luxury motor coaches per year at $54,400 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 13,440 of these campers per year at $7,680 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 3,200 units per year, and reduce the sales of its motor coaches by 832 units per year. The amount to use as the annual sales figure when evaluating this project is $____________.
- Summer Tyme, Inc., is considering a new 5-year expansion project that requires an initial fixed asset investment of $5.778 million. The fixed asset will be depreciated straight-line to zero over its 5-year tax life, after which time it will be worthless. The project is estimated to generate $5,136,000 in annual sales, with costs of $2,054,400. If the tax rate is 33 percent, the OCF for this project is $___________.
- Summer Tyme, Inc., is considering a new 5-year expansion project that requires an initial fixed asset investment of $1.242 million. The fixed asset will be depreciated straight-line to zero over its 5-year tax life, after which time it will be worthless. The project is estimated to generate $1,104,000 in annual sales, with costs of $441,600. If the tax rate is 32 percent and the required return on the project is 9 percent, the NPV for this project is $___________.
- Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $1.404 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which time it will have a market value of $109,200. The project requires an initial investment in net working capital of $156,000. The project is estimated to generate $1,248,000 in annual sales, with costs of $499,200. The tax rate is 32 percent and the required return on the project is 11 percent. The NPV for this project is $____________.
- Dog Up! Franks is looking at a new sausage system with an installed cost of $904,800. This cost will be depreciated straight-line to zero over the project’s 9-year life, at the end of which the sausage system can be scrapped for $139,200. The sausage system will save the firm $278,400 per year in pretax operating costs, and the system requires an initial investment in net working capital of $64,960. If the tax rate is 34 percent and the discount rate is 11 percent, the NPV of this project is $_______________.
- Your firm is contemplating the purchase of a new $1,764,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $157,500 at the end of that time. You will save $693,000 before taxes per year in order processing costs and you will be able to reduce working capital by $139,499 (this is a one-time reduction). If the tax rate is 33 percent, the IRR for this project is __________ percent.
| Consider a project to supply Detroit with 49,000 tons of machine screws annually for automobile production. You will need an initial $2,107,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $490,000 and that variable costs should be $220 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 6-year project life. It also estimates a salvage value of $539,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $250 per ton. The engineering department estimates you will need an initial net working capital investment of $441,000. You require a 15 percent return and face a marginal tax rate of 39 percent on this project. | |
| a. | The estimated OCF for this project is $ and the NPV is $_________. |
| b. | Suppose you believe that the accounting department’s initial cost and salvage value projections are accurate only to within ±15 percent; the marketing department’s price estimate is accurate only to within ±9 percent; and the engineering department’s net working capital estimate is accurate only to within ±6 percent. Your worst-case NPV for this project is $______ and your best-case NPV is $. |
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