Perfect Chef Company is constantly developing and marketing new cooking accessories. Based on past experience in forecasting
Question:
Perfect Chef Company is constantly developing and marketing new cooking accessories. Based on past experience in forecasting cash flows for a new product, Perfect Chef has been able to predict cash flows within \(10 \%\) of actual results. The longer the estimated life of a particular product, the greater the uncertainty surrounding future cash flows. The company currently is evaluating a project that is expected to have a five-year service life.
Accordingly, in performing net present value analysis of new product offerings, the company computes three different net present value figures: most likely, optimistic, and pessimistic. On a five-year project, the pessimistic computation assumes that the cash flows are overstated by \(10 \%\) in the first three years of the project and by \(50 \%\) in the last two years. The optimistic computation assumes that the estimates are understated by \(10 \%\) in the first three years and \(50 \%\) during the last two years. The most likely computations use the estimates without adjustment.
Perfect Chef is developing a new pressure cooker. To produce the pressure cooker, \(\$ 625,000\) must be invested in special equipment. The following are estimated net annual cash inflows that have been developed to analyze the potential product:
Required
A. Prepare a schedule of cash flows for five years based on the three methods described.
B. Compute the net present value for each of the three methods.
C. Compute the payback period for each of the three methods.
D. Based on your calculations in requirements (B) and (C), would you advise Perfect Chef to produce the cooker? Explain your answer.
E. Explain why Perfect Chef might not want to invest in a product that has a payback period greater than three years.
Step by Step Answer:
Managerial Accounting Information For Decisions
ISBN: 9780324222432
4th Edition
Authors: Thomas L. Albright , Robert W. Ingram, John S. Hill