Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for

J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $7,700, including a set of eight chairs. The company feels that sales will be 2,150, 2,300, 2,850, 2,700, and 2,450 sets per year for the next five years, respectively. Variable costs will amount to 50 percent of sales and fixed costs are $1,970,000 per year. The new tables will require inventory amounting to 8 percent of sales, produced and stockpiled in the year prior to sales. It is believed that the addition of the new table will cause a loss of 500 tables per year of the oak tables the company produces. These tables sell for $5,000 and have variable costs of 45 percent of sales. The inventory for this oak table is also 8 percent of sales. The sales of the oak table will continue indefinitely. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $18,000,000. However, the excess production capacity means the company can produce the new table without buying the new equipment. The company controller has said that the current excess capacity will end in two years with current production. This means that if the company uses the current excess capacity for the new table, it will be forced to spend the $18,000,000 in two years to accommodate the increased sales of its current products. In five years, the new equipment will have a market value of $3,600,000 if purchased today, and $7,200,000 if purchased in two years. The equipment is depreciated on a seven-year MACRS schedule. The company has a tax rate of 21 percent and the required return for the project is 14 percent. MACRS schedule Calculate the NPV of new project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)

What is the NPV?

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

Corporate Finance

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

12th edition

1259918947, 1260091908, 978-1259918940

More Books

Students also viewed these Finance questions

Question

Review The New Employee, the case study for Chapter

Answered: 1 week ago