11. You are trying to decide if your company should enter the biscuit business. To make...
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11. You are trying to decide if your company should enter the biscuit business. To make this decision the company is considering a four year project called Project Chocolate. Your company plans on using a cost of capital of 17% to evaluate this project. Based on extensive research, it has prepared the following: o Revenues will be $6,000,000 per year Cost of Goods Sold will be 50% of revenues each year o Costs of purchasing and installing a machine are $5,500,000 O You will use straight-line depreciation and depreciate the machine to 100,000 ▪ The machine will have a useful life of 4 years and will be sold for $300,000 at the end of the fourth year . Net working capital will increase by $150,000 in the first 3 years, then will decrease by $200,000 in the fourth year Your marginal tax rate is 40% a. Should you go ahead with this project if you use the NPV rule? Answer: The NPV = $811,865 is positive, so yes GO AHEAD with this project b. Your board of directors likes to use the payback rule to evaluate projects. If they ONLY accept projects with a payback period of 3 years or less, would you recommend this project to the board? Answer: Payback period=2.51 so YES recommend project to board. 11. You are trying to decide if your company should enter the biscuit business. To make this decision the company is considering a four year project called Project Chocolate. Your company plans on using a cost of capital of 17% to evaluate this project. Based on extensive research, it has prepared the following: o Revenues will be $6,000,000 per year Cost of Goods Sold will be 50% of revenues each year o Costs of purchasing and installing a machine are $5,500,000 O You will use straight-line depreciation and depreciate the machine to 100,000 ▪ The machine will have a useful life of 4 years and will be sold for $300,000 at the end of the fourth year . Net working capital will increase by $150,000 in the first 3 years, then will decrease by $200,000 in the fourth year Your marginal tax rate is 40% a. Should you go ahead with this project if you use the NPV rule? Answer: The NPV = $811,865 is positive, so yes GO AHEAD with this project b. Your board of directors likes to use the payback rule to evaluate projects. If they ONLY accept projects with a payback period of 3 years or less, would you recommend this project to the board? Answer: Payback period=2.51 so YES recommend project to board.
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11 You are trying to decide if your company should enter the biscuit business To make this decision ... View the full answer
Related Book For
Operations management in the supply chain decisions and cases
ISBN: 978-0077835439
7th edition
Authors: Roger G Schroeder, M. Johnny Rungtusanatham, Susan Meyer Goldstein
Posted Date:
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