A company is considering whether to launch a new product. A consulting firm was contacted, and...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A company is considering whether to launch a new product. A consulting firm was contacted, and after a survey the company is invoiced 250,000 for, the consulting firm presents the following analysis: To produce the product, the company needs fixed assets that cost 1,000,000 and that have 5 years service life. The scrapping value is 0. If the intended expansion is to be implemented the company must increase the capital tied up in working capital. It is estimated that trade receivables will remain 100,000, inventories 90,000 while accounts payable are budgeted at 80,000. I The introduction costs for the new product will be 400,000, and will accrue in year 1. The company's old turnover has been 2,000,000. If the new product is launched, it is raining that the new product will give an increased turnover of 1,000,000. In addition, it is calculated also that the product will increase the turnover volume of the other products by 10% annually in the whole period. The product is priced so that it provides the same coverage as the company's others production, ie 60%. The annual fixed costs excluding interest and depreciation have so far been 500,000 annually, but will increase to 700,000 annually if the new product is produced and sold. The share beta on the company's shares is 1.4 and the return on the market marfalla in 100/ Thin company harrow manastion Interctra.of 3.000/ DI C 11 The share beta on the company's shares is 1.4 and the return on the market portfolio is 10%. The company can borrow money at an interest rate of 3.90% before tax, while the risk-free interest rate is 2% before tax. Fixed assets are depreciated for tax purposes according to the balance method at 20% annually and the company finances its investments with a debt ratio of 52%. The tax rate is 22%. I a) Calculate the project's required return after tax (WACC). b) Calculate the present value of the project and consider whether the company should acquire this machine and launch the new product. c) What is the repayment period for the proiect provided that the income. a) Calculate the project's required return after tax (WACC). Stier b) Calculate the present value of the project and consider whether the company should acquire this machine and launch the new product. c) What is the repayment period for the project provided that the income comes through evenly the year? Consider whether the company should carry out the project if the company accepts one repayment period of 4 years for similar projects. I d) We now imagine that the company bought the fixed assets and launched the product. It's over now one year since the machine was purchased, and the company has now found that part of the estimates man built their analysis on were inaccurate. It turned out that the turnover for the new product was 15% lower than expected. The fixed costs were 720,000 and not 700,000 the project had been accepted if one had known about this in advance? A company is considering whether to launch a new product. A consulting firm was contacted, and after a survey the company is invoiced 250,000 for, the consulting firm presents the following analysis: To produce the product, the company needs fixed assets that cost 1,000,000 and that have 5 years service life. The scrapping value is 0. If the intended expansion is to be implemented the company must increase the capital tied up in working capital. It is estimated that trade receivables will remain 100,000, inventories 90,000 while accounts payable are budgeted at 80,000. I The introduction costs for the new product will be 400,000, and will accrue in year 1. The company's old turnover has been 2,000,000. If the new product is launched, it is raining that the new product will give an increased turnover of 1,000,000. In addition, it is calculated also that the product will increase the turnover volume of the other products by 10% annually in the whole period. The product is priced so that it provides the same coverage as the company's others production, ie 60%. The annual fixed costs excluding interest and depreciation have so far been 500,000 annually, but will increase to 700,000 annually if the new product is produced and sold. The share beta on the company's shares is 1.4 and the return on the market marfalla in 100/ Thin company harrow manastion Interctra.of 3.000/ DI C 11 The share beta on the company's shares is 1.4 and the return on the market portfolio is 10%. The company can borrow money at an interest rate of 3.90% before tax, while the risk-free interest rate is 2% before tax. Fixed assets are depreciated for tax purposes according to the balance method at 20% annually and the company finances its investments with a debt ratio of 52%. The tax rate is 22%. I a) Calculate the project's required return after tax (WACC). b) Calculate the present value of the project and consider whether the company should acquire this machine and launch the new product. c) What is the repayment period for the proiect provided that the income. a) Calculate the project's required return after tax (WACC). Stier b) Calculate the present value of the project and consider whether the company should acquire this machine and launch the new product. c) What is the repayment period for the project provided that the income comes through evenly the year? Consider whether the company should carry out the project if the company accepts one repayment period of 4 years for similar projects. I d) We now imagine that the company bought the fixed assets and launched the product. It's over now one year since the machine was purchased, and the company has now found that part of the estimates man built their analysis on were inaccurate. It turned out that the turnover for the new product was 15% lower than expected. The fixed costs were 720,000 and not 700,000 the project had been accepted if one had known about this in advance?
Expert Answer:
Answer rating: 100% (QA)
Part A WACC kd1T ks kd1T 39 x 122 302 ks 10 302 698 WACC 302 698 10 Part b PV 1000000082500000641000... View the full answer
Related Book For
Financial and Managerial Accounting
ISBN: 978-1285078571
12th edition
Authors: Carl S. Warren, James M. Reeve, Jonathan Duchac
Posted Date:
Students also viewed these accounting questions
-
The management of Dominican Sugar Company is considering whether to process further raw sugar into refined sugar. Refined sugar can be sold for $ 2.20 per pound, and raw sugar can be sold without...
-
The Plastic Lumber Company is considering whether it should replace an extrusion machine. The new machine will produce 40% more finished lumber than the old machine. The increase in production will...
-
The management of Caribbean Sugar Company is considering whether to process further raw sugar into refined sugar. Refined sugar can be sold for $1.90 per pound, and raw sugar can be sold without...
-
The specific activity of a preparation consisting of radioactive Co58 as and non-radioactive Co59 ao is equal to 2.2.1012 dis /(s g). The half-life of Co58 as is 71.3 days. Find the ratio of the mass...
-
Explain the differences among operations systems with respect to tangibility of products, levels of customer involvement, operations flexibility, and management of resources and technology.
-
From a pulse input into a vessel we obtain the following output signal We want to represent the flow through the vessel with the tanks-in-series model. Determine the number of tanks to use. Time, min...
-
Don Griffin worked as an accountant at a local accounting firm for five years after graduating from college. Recently, he opened his own accounting practice, which he operates as a corporation. The...
-
A strand of wire has resistance 5.60. Find the net resistance of 120 such strands if they are. (a) Placed side by side to form a cable of the same length as a single strand, and (b) connected end to...
-
Sports Innovators has developed a new design to produce hurdles that are used in track and field competition. The company's hurdle design is innovative in that the hurdle yields when hit by a runner...
-
Cinder Inc. is a Canadian-controlled private corporation based in your province. The company operates a wholesale business. The following information is provided for its year ended May 31, 2020: 1....
-
The demand curve for cookies is a rightward curve and the quantity demanded is 100 when the price of cookies is $2.00. What happens to consumer surplus when the price is $3.00? What happens to...
-
What is cyberstalking?
-
What was the result of the Marvin decision?
-
Why did courts traditionally deny relief to cohabiting couples upon dissolution of their relationship?
-
Define the temptation stable analysis pattern.
-
What is stalking?
-
Use the information in the following table to reconcile the checking account of Four Season Pool Care. Find the dollar amount of outstanding checks. Balance from bank statement $ 4338.76 Checks...
-
Write the binomial probability in words. Then, use a continuity correction to convert the binomial probability to a normal distribution probability. P(x 110)
-
The Norsk Division of Gridiron Concepts Inc. has been experiencing revenue and profit growth during the years 20122014. The divisional income statements are provided below. Assume that there are no...
-
Which of the following industries would typically use job order costing, and which would typically use process costing? Steel manufactuirng ........................Computer chip manufacturing...
-
What are some potential disadvantages of fair value accounting?
-
What is the difference between a primary beneficiary relationship and a foreseen party relationship?
-
What is the difference between a privity relationship and a primary beneficiary relationship?
-
What is the difference between a foreseen party relationship and a foreseeable party relationship?
Study smarter with the SolutionInn App