Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Drilling-Easy (DE) Inc. currently has two products, low-priced drills and a line of smart drill bits. DE Inc. has decided to sell a new line

Drilling-Easy (DE) Inc. currently has two products, low-priced drills and a line of smart drill bits. DE Inc. has decided to sell a new line of high-priced drills. Sales for the new line of drills are estimated at

$21

million a year. Annual variable costs are

60%

of sales. The project is expected to last

5

years. In addition to the production variable costs, the fixed costs each year will be

$2,000,000.

The company has spent

$1,500,000

in a marketing and research study that determined the company will gain

$9

million in sales a year of its existing line of smart drill bits. The production variable cost of these sales is

$7

million a year. The plant and equipment required for producing the high-priced drills costs

$10,000,000

and will be depreciated down to zero over

20

years using straight-line depreciation. It is expected that the plant and equipment can be sold for

$2,000,000

at the end of the project. The project will also require an increase in net working capital of

$3,000,000

today that will be returned at the end of the project. The tax rate is

20

percent and the require rate of return for this project is

16%.

a. What is the initial outlay (IO) for this project?

The Initial Outlay is

$enter your response here.

(Round your answer to the nearest dollar - no decimals - and commas are required to separate thousands and millions. Use negative sign for negative cash flows - do not use parenthesis).

b. What is the operating cash flows (OCF) for each of the years for this project?

The OCF for each year of the project are

$enter your response here.

(Round your answer to the nearest dollar - no decimals - and commas are required to separate thousands and millions. Use negative sign for negative cash flows - do not use parenthesis).

c. What is the termination value (TV) cash flow (aka recovery cost or after-tax salvage value, or liquidation value of the assets) at the end of the project?

The termination value at the end of the project is

$enter your response here.

(Round your answer to the nearest dollar - no decimals - and commas are required to separate thousands and millions. Use negative sign for negative cash flows - do not use parenthesis).

d. What is the NPV of this project?

The NPV of this project is

$enter your response here.

(Round your answer to the nearest dollar - no decimals - and commas are required to separate thousands and millions. Use negative sign for negative cash flows - do not use parenthesis).

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

States And The Reemergence Of Global Finance

Authors: Eric Helleiner

1st Edition

0801428599, 978-0801428593

More Books

Students also viewed these Finance questions

Question

What lessons in OD contracting does this case represent?

Answered: 1 week ago

Question

Does the code suggest how long data is kept and who has access?

Answered: 1 week ago