my question is is my cost of capital correct. from the given numbers on the picture can you tell if its correct or not? do I take the cost of the new rotomold oven minus the salvage value to get the cost of capital or do I just take the cost of the new rotomold oven??
Current Designs manufactures kayaks. Pedal Boats, Inc. has approached Current Designs about using its rotomold expertise and equipment to produce some pedal boat components for Pedal Boats Inc.. Current Designs is interested in exploring this opportunity, but is concerned that the pedal boats are a Different shape than the kayaks it currently produces. Current Designs would need to buy an additional rotomold oven in order to produce the pedal boat components. This project clearly involves risks, and management wants to ensure the returns justify the risks. As an intern at Current Designs, you have been asked to prepare an initial evaluation of this proposal. To aid in your analysis, the following information and assumptions have been provided. Present Value tables are include in the 2nd worksheet tab for your use. Enter labels, cell references, formulas, and typed answers where indicated. -Cost of the new rotomold oven -Salvage Value of the new rotomold oven -Discount Rate $240,000 $8,000 15% -Useful Life of the new rotomold oven in years -Depreciation Method - Projected Annual Net Income for this project Straight-Line $ 15,200 $232,000 $ 1. Compute Annual Depreciation Expense. Depreciable Cost Estimated Life Annual Depreciation Expense 2. Compute Net Annual Cash Flows projected net income depreciation Net Annual Cash Flows 23,910 29,000 52,910 2000 29000 $ 3. Compute the Payback Period. Cost of Capital Net annual cash flows $240,000 52,910 $ 4.54 years 5. Based on the Internal Rate of Return, would this project be acceptable? Explain. 4. What is the approximate Internal Rate of Return of this project? 15% YES, INTERNAL RATE OF RETURN APPROXIMATES COST OF CAPITAL Current Designs manufactures kayaks. Pedal Boats, Inc. has approached Current Designs about using its rotomold expertise and equipment to produce some pedal boat components for Pedal Boats Inc.. Current Designs is interested in exploring this opportunity, but is concerned that the pedal boats are a Different shape than the kayaks it currently produces. Current Designs would need to buy an additional rotomold oven in order to produce the pedal boat components. This project clearly involves risks, and management wants to ensure the returns justify the risks. As an intern at Current Designs, you have been asked to prepare an initial evaluation of this proposal. To aid in your analysis, the following information and assumptions have been provided. Present Value tables are include in the 2nd worksheet tab for your use. Enter labels, cell references, formulas, and typed answers where indicated. -Cost of the new rotomold oven -Salvage Value of the new rotomold oven -Discount Rate $240,000 $8,000 15% -Useful Life of the new rotomold oven in years -Depreciation Method - Projected Annual Net Income for this project Straight-Line $ 15,200 $232,000 $ 1. Compute Annual Depreciation Expense. Depreciable Cost Estimated Life Annual Depreciation Expense 2. Compute Net Annual Cash Flows projected net income depreciation Net Annual Cash Flows 23,910 29,000 52,910 2000 29000 $ 3. Compute the Payback Period. Cost of Capital Net annual cash flows $240,000 52,910 $ 4.54 years 5. Based on the Internal Rate of Return, would this project be acceptable? Explain. 4. What is the approximate Internal Rate of Return of this project? 15% YES, INTERNAL RATE OF RETURN APPROXIMATES COST OF CAPITAL
