Question
FasinTek Products is considering launching a new trailer hitch coupler that is designed to provide a better and safer way to tow boats and camper
FasinTek Products is considering launching a new trailer hitch coupler that is designed to provide a better and safer way to tow boats and camper trailers for off-road use. They are forecasting increasing sales for the first three years, but then a decrease in year four as competitors arrive on the scene.
Year | Unit Sales |
1 | 12,000 |
2 | 14,000 |
3 | 16,000 |
4 | 15,000 |
They plan to sell the units for $26.50 in years 1-2, $27.50 in year 3, but only $23.00 in year 4 when competitors begin to put downward pressure on the price. FasinTeks cost to produce the devices is $13.50 per unit, while their fixed costs are $26,000 per year. The marketing department believes the coupling device will actually provide some competition to the companys current line of hitch products, cutting into sales of their current products at a level of $2000 per year. They estimate that the project will require an initial increase in current assets of $10,000, and an increase in current liabilities of $6000. They assume full recovery of NOWC at the end of the project. The cost of the assembly equipment will be $300,000, with additional shipping costs of $4000, and installation costs of $20,000. The equipment is classified as 3-year MACRS property. The operations manager believes the equipment can be salvaged at the end of the project for $84,000. FasinTeks marginal tax rate is 34% and the required return on the project is 24%.
Question 1
What is the NPV of the project?
4670
2007
-4244
5680
-3432
Question 2
Suppose the product manager believes the new product will be adopted by many on-road haulers as well. She suggests that competition to the companys current line of hitch products will be greater than originally estimated, cutting into sales of their current products at a level of $10,000 per year. How does this affect the NPV?
New NPV = -8024
New NPV = -12,471
New NPV = 127
New NPV = 1581
Question 3
Going back to the original project description and estimates, suppose the production manager comes back with a revised estimate of how much it will cost to produce the coupler. She indicates a projected shortage of raw materials could push the cost to produce the devices to $15.50 per unit. What happens to the NPV?
New NPV = -17,348
New NPV = -820
New NPV = -39,575
New NPV = 12,480
Question 4
Going back to the original project description and estimates, suppose FasinTek can recover only 50 percent of the original change in NOWC. How would this affect the NPV?
New NPV = 1008
New NPV = 3824
New NPV = -1200
New NPV = 6448
Answer the next four questions about the following project.
Geodyne Corp. is considering an investment in a new type of desalination equipment. The equipment should allow them to streamline their raw material processing by moving some of the production off-shore. If implemented, it is expected to provide an annual (pre-tax) cost savings of $201,000 in each of the next three years. The equipment will cost $510,000, and is classified as 3-year MACRS property. Geodyne expects to salvage the equipment for $96,000 at the end of the three years. Geodyne has a 40% marginal tax rate and a WACC of 9%.
Question 5
What is the NPV of the project?
11,235
8347
14,980
-3412
13,435
Question 6
Suppose the firm's sharp, new financial analyst from UAH reminds the project manager that the new equipment will have to be towed off-shore on a barge that the firm currently leases out to a commercial mining company at $5600 per year. How will this affect the NPV?
New NPV = 3214
This is not a relevant cash flow, therefore NPV does not change.
New NPV = 4930
New NPV = 1290
New NPV = -76
Question 7
Going back to the original project description and estimates, suppose Geodyne can only salvage the equipment for $86,000. How does this affect the NPV?
Group of answer choices
New NPV = 247
New NPV = -2156
New NPV = -987
New NPV = 8802
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Question 8 pts
Going back to the original project description and estimates, suppose the VP for Operations suggests that this project is riskier than others believe. Hence, the required return should be greater than the firm's overall WACC. She suggests the required return should be 13.5 percent. How does this affect the NPV?
Group of answer choices
New NPV = -6,345
New NPV = -26,982
New NPV = 6,592
New NPV = 12,672
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