Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Howard Inc. is planning to build a plant to supply special purpose batteries for electric car manufacturers. It will require the company to invest $25

Howard Inc. is planning to build a plant to supply special purpose batteries for electric car manufacturers. It will require the company to invest $25 million in plant and equipment to manufacture the batteries. The plant is expected to operate for five years after which it will be closed down. The plant and equipment purchased is expected to be sold for $5.0 million at the end of the five-year period. The equipment is expected to be depreciated on the basis of a 5-year MACRS schedule (20%, 32%, 19%, 12%, 11%, and 6.0% respectively). Net working capital required is expected to be 1% of next year sales. The companys tax rate is 21%. The company plans to sell 1.5 million units of batteries in the first year. Beyond that, unit sales are expected to increase by 3%. The variable cost per unit for each battery is expected to be $450. The annual fixed costs are expected to be $75 million. The selling price per unit is expected to be $485. The firms cost of capital is 12%. What is the NPV of the contract? What is the minimum price per unit the company should charge for the project to be profitable?

Assumptions
Depreciation Schedule
Unit Sales First Year -millions 1.50 1 2 3 4 5 6
Growth in Unit Sales 3% Beg BV
Working Capital Yrs 1-5 as %Next Year Sales 1% Dep Rate 20% 32% 19% 12% 11% 6%
Equipment Cost $ 20.00 Dep Amt
Fixed Costs per Year in millions $ 75.00 Ending BV
Equipment Selling Price in Year 5 $ 5.00
Variable cost per unit $ 450.00
Selling Price per Unit (Yrs 1-5) $ 485.00
Tax Rate 21%
Cost of Capital 12%
Minimum Bid Price
Years 1 2 3 4 5
Unit Volume
Sales
Variable Costs
Fixed Costs
Depreciation
EBIT
EBIT*(1-T)
Operating Cash Flow

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_2

Step: 3

blur-text-image_step3

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

Fundamental Cornerstones Of Managerial Accounting

Authors: Dan L. Heitger, Maryanne M. Mowen, Don R. Hansen

1st Edition

ISBN: 0324378068, 9780324378061

More Books

Students also viewed these Accounting questions